Section 80CCD: Deductions For NPS And APY Contributions
We must make the most of every penny to build a sizable corpus. Understanding tax deductibles becomes important. We must pay taxes as citizens, but there are ways to reduce the tax burden.
Among the numerous tax-saving measures, one is closely linked to your post-retirement planning – Section 80CCD, which allows more than ₹ 200,000 deductions.
This section allows central Government employees or other individuals to claim a deduction for contributions made towards a notified government pension scheme.
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 NPS?
National Pension System (NPS) is a government-sponsored pension scheme for the citizens of India. It is a defined contribution scheme, which means the amount of pension received by the subscriber depends on the contributions made, the returns earned on those contributions, and the number of years for which contributions have been made. The Pension Fund Regulatory and Development Authority (PFRDA) manages the scheme.
There are two types of NPS accounts:
- Tier I account: This is a non-withdrawable account used for retirement planning. The contributions made to this account are eligible for tax deductions under Section 80CCD(1) and 80CCD(1B) of the Income Tax Act.
- Tier II account: This is a withdrawable account linked to the Tier I account. This account can be used for short-term financial goals such as purchasing a house or children’s education. The contributions made to this account are not eligible for tax deductions.
Individuals can open Tier I and Tier II accounts and manage them separately. However, to open a Tier II account, one must first open a Tier I account.
Eligibility criteria for NPS
- You must be an Indian citizen (resident or non-resident).
- You should be between the ages of 18 and 60.
- 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 on 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.
What is Atal Pension Yojana?
The Pradhan Mantri Pension Yojana (PMPJ) or Atal Pension Yojana is a government-sponsored 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.
Like 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 for APY:
- 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 need to be qualified to receive government contributions under APY.
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 eligible 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 total gross income for other self-employed individuals.
However, the deduction is subject to the limit of Section 80 CCE. According to Section 80 CCE, contributions made under Section 80C, 80 CC and 80CCD will be subject to a maximum limit of ₹150,000.
What is Section 80CCD(1B)?
Section 80CCD(1B) of the Income Tax Act provides an additional tax benefit for contributions to the National Pension System (NPS). Under this section, an individual can claim a deduction of up to ₹ 50,000 from their taxable income for contributions to the NPS. This section is in addition to the deductions available under Section 80CCD(1) and Section 80C of the Income Tax Act.
The deductions under Section 80CCD(1B) are over and above the limit of ₹1.5 Lakhs available under Section 80C.
This section applies to all individuals, including salaried employees and self-employed individuals, who have an NPS account and have contributed to it during the financial year. The individual should submit the contribution statement and proof of contribution while filing their income tax returns to claim the deductions under this section.
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 limit of deduction eligible under Section 80CCD(2)
Section 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.
Remember 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.
- Employer’s Contribution
Employers can also contribute to the NPS account of their employees, which is eligible for tax benefits under section 80CCD(2) up to 10% of the employee’s salary, subject to a maximum of ₹1.5 lakhs.
Now that you have all the information about Sec 80CCD, you can plan your investments better and thus reduce your tax burden. However, it’s important to consult a tax expert or refer to the Income Tax Act and the Pension Fund Regulatory and Development Authority (PFRDA) guidelines to avoid common mistakes and ensure compliance with Section 80CCD.
Frequently Asked Questions
Can I invest more than ₹50,000 in NPS?
Yes, you can contribute 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. NPS or APY contributions are eligible for Section 80CCD tax deductions.
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.