To build a sizable corpus for the future, we must make the most of every penny we earn. This is where understanding tax deductibles becomes important. While as citizens we must pay taxes, there are also ways to reduce the tax burden. Hence, carefully examine the tax deductions permitted under the Income Tax Act of India.
Among the numerous tax-saving measures, one comes closely linked to your post-retirement planning – Section 80CCD which allows deductions of more than ₹ 200,000!
This section allows central Government employees or other individuals to claim a deduction for contributions made towards a notified government pension scheme.
Currently, the government has notified the National Pension Scheme(NPS) and Atal Pension Yojana(APY) for deduction under this section.
So, let us now discuss the provisions of Section 80CCD in detail. But before we do so, here’s a quick look at the two pension schemes eligible for deductions under this section.
What is the National Pension Scheme?
The National Pension Scheme is a retirement plan originally implemented in 2004. Intended initially for government personnel, in 2009 it was expanded to include non-government employees.
Anyone over 18 who works in the private, public, or independent sectors, as well as for themselves, can now invest in the National Pension Scheme. NPS is a market-linked instrument that fund managers manage.
For those working for the central government, the NPS is an obligatory retirement plan. There are two types of NPS accounts Tier I and Tier II. While Tier I is a retirement scheme, Tier II is meant for general investment. The former has a lock-in period and matures on retirement. On the other hand, the latter can be liquidated more flexibly.
Eligibility criteria for NPS
- You must be an Indian citizen (resident or non-resident).
- You should be between the ages of 18 and 70.
- You must follow the Know Your Customer (KYC) guidelines outlined in the application form.
- You must be legally able to execute a contract under the Indian Contract Act.
- You cannot enrol to the NPS if you are a Person of Indian Origin (PIO) or a Hindu Undivided Family (HUF).
- Since NPS is meant for individuals, a third party cannot open one on their behalf.
The following is a summary of the National Pension Scheme:
|Particulars||NPS Tier-I Account||NPS Tier-II Account|
|Permit to Withdraw||As per the rules/regulations||Permitted|
|Tax exemption limit||Up to ₹2 lakh p.a.(Under 80C and 80CCD)||₹1.5 lakhs for government employees|
|Minimum contribution for opening an account||₹500||₹1,000|
|Minimum NPS contribution otherwise||₹500 per month or ₹1,000 p.a||₹250|
|Maximum NPS contribution||No limit specified||No limit specified|
What is Atal Pension Yojana?
The Pradhan Mantri Pension Yojana (PMPJ) or Atal Pension Yojana is a government-sponsored retirement programme offering a minimum guaranteed retirement pension.
The Atal Pension Yojana is specifically built for people who work in the unorganised sector. Individuals aged 18 to 40 are eligible to invest in the scheme.
Similar to the National Pension Scheme, Atal Pension Yojana contributions remain locked in until the investor turns 60; premature withdrawals are allowed only in certain situations.
Eligibility criteria for Atal Pension Yojana
Any Indian citizen can participate in the APY scheme. The following are the eligibility criteria:
- You must be between 18 and 40 years of age.
- You ought to have a savings account with a bank or post office.
The recipients of statutory social security benefits are not qualified to receive government contributions under APY. Members of the following Social Security Schemes, for example, would not be eligible for Government co-contribution under APY. Here is a broad list of inv:
The tax benefits of APY are comparable to those of the NPS:
- Contributions to the Atal Pension Yojana of up to ₹1,50,000 are tax-deductible under Section 80CCD(1).
- Self-employed people may deduct up to 20% of their annual income from investments made through the Atal Pension Yojana if that income stands at ₹ 1,50,000.
- Investors can expect to earn guaranteed pensions of ₹1,000, ₹2,000, ₹3,000, ₹4,000, or ₹5,000 per month after retirement, depending on the number of contributions made. This pension income, however, is taxable.
What is the limit for deductions under Section 80CCD (1)?
Below is a breakup of the limit of tax deductions allowed under this section:
- 10% of the salary for individuals employed with the government or otherwise.
- 20% of gross total income for other self-employed individuals.
However, the deduction is subject to the limit of Sec 80 CCE. As per Sec 80 CCE, contributions made under sec 80C, 80 CC and 80CCD will be subject to a maximum limit of ₹150,000.
Let us understand the deduction with the help of an example.
Assume you are employed with Company B. You contribute 15% of your salary towards the National Pension Scheme. Assuming your total salary is ₹800,000. In this case, 15% of your salary sums up to ₹ 120,000.
Therefore, the limit applicable to you for claiming a deduction under Sec 80CCD would be up to 10% of your salary, i.e. 10 % of ₹800,000= ₹80,000.
Note that even though your contribution did not exceed the limit of ₹150,000 as mentioned in Section 80CCC, your deduction for Section 80 CCD will be restricted to ₹80,000.
I know exactly what you’re thinking! What about the remaining ₹50,000, because this only allows for a maximum deduction of ₹150,000? This is where Section 80CCD(1B) comes into play.
Section 80CCB (1B) allows an individual to deduct the total amount paid towards NPS up to a maximum of ₹50,000 over and above the limit given in Sec 80CCD (1).
deductions Permitted under Sec 80CCD (1B)
An investment made by an individual towards NPS/APY is permitted to be deducted. However, you are not eligible to duplicate your claim. In simple terms, you cannot claim what has already been claimed under Sec 80CCD(1).
What is the Maximum Deduction Under Section 80CCD(1B)?
You will be eligible for a maximum deduction of ₹50,000, excluding the limit of ₹150,000 applicable for Sec 80CCD(1).
Let us continue the example taken before:
Assume you contribute 15% of your salary towards the NPS. Let’s also suppose that your total salary is ₹800,000. Hence, 15% of your = ₹120,000.
Therefore, the deduction under Section 80CCD was up to 10% of your salary, i.e. 10 % of ₹ 800,000= ₹ 80,000.
Here, you were denied the deduction of ₹40,000 as it exceeded the limit as per Section 80CCD(1).
You can claim this excess investment of ₹40,000 as a deduction under Section 80CCD(1) under Section 80CCD (1B).
Take another case where your total income is ₹5,00,000. You invested ₹180,000 (12% of your salary) into NPS. However, as per Sec 80CCD(1), your deduction would be restricted to 10% of your salary, i.e. ₹150,000.
The remaining ₹30,000 can be claimed as a deduction under Sec 80CCD(1B) even though it crosses the limit of ₹150,000.
That’s not all!
Section 80CCD(2) also enables you to claim a deduction for all contributions made by the Central Government or your employer to your account over and above the limit of Section 80CCD (1).
limit of deduction eligible under Section 80CCD(2)
Sec 80CCD (2) allows you to claim a deduction for the contribution made by your employer or Central Government to your NPS or APY account. However, this deduction is restricted to a maximum of:
- 14% in case of contribution by the central government
- 10% in case of contribution by the employer (for non-government employees)
This deduction is not subject to the limit of ₹150,000 as mentioned in Section 80CCE.
You should keep in mind that such contributions made by your employer towards your pension account will first be added to your income and later deducted under Section 80CCD(2).
Benefits offered by Sec 80CCD
- Exemption from tax on closure/opt-out of NPS account
By Section 80CCD, any payment made by the National Pension System Trust to an assessee in connection with the closing of the pension plan or their decision to exit it is subject to tax. However, according to Section 10(12A), any payment made by the National Pension System Trust to an assessee in connection with the closure of the pension plan mentioned in Section 80CCD or the assessee’s decision to leave the plan is exempt from tax. The exemption is subject to a maximum of 60% of the total amount due to them at the time of closure or their decision to leave the plan.
- Exemption on payment from NPS Trust to an employee on partial withdrawal
To give relief to an employee who has invested in the NPS, Section 10(12B) states that any payment made by the National Pension System Trust to the assessee under the pension plan mentioned in Sec 80CCD upon partial withdrawal and by the terms established under the Pension Fund Regulatory and Development Authority Act, 2013, shall be free from tax to the extent it does not exceed 25% of the amount.
Now that you have all the information about Sec 80CCD, you can plan your investments better and thus reduce your tax burden.
Frequently Asked Questions
What investment proof do I need to show to qualify for the NPS tax benefit?
The transaction statement may be provided as evidence of investment. The Tier I account receipt for the relevant financial year can also be used as evidence and be downloaded by logging into your NPS account.
What tax advantages apply to investments made through a Tier II account?
Investments made toward Tier II NPS Accounts are not tax deductible.
Can I invest more than ₹50,000 in NPS?
Yes, you are permitted to make contributions to the National Pension Scheme greater than ₹50,000. While there is no maximum investment limit, a tax deduction may only be claimed up to a maximum of ₹200,000.
Is 80CCD a part of 80C?
Section 80CCD is not a part of Section 80C. Contributions to NPS or APY are the ones eligible for Section 80CCD tax deductions.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.