Section 80CCD is one of the popular sections after Section 80C with regards to tax deductions of the Income Tax Act, 1961. It covers the National Pension Scheme (NPS) and Atal Pension Yojana (APY). This deduction is available to all citizens of India, including NRIs. In this article, we have covered everything one needs to know about Section 80CCD in detail.
What is section 80CCD?
Section 80CCD deduction of the Income Tax Act, 1961 is the section for deductions for contributions to NPS and Atal Pension Yojana (APY). All NPS contributions that an employer makes on behalf of the employee are also a part of this section. Section 80CCD includes two schemes, NPY and APY. Additionally, it contains two subsections Section 80CCD1 and Section 80CCD2.
National Pension Scheme (NPS) is a voluntary retirement plan available to the citizens of India. It is a government launched pension plus investment scheme. All employees of the organised and unorganised sector can invest in this scheme. The scheme allows investors to avail tax benefits on investments up to INR 2 lakhs under 80CCD(1) and 80CCD(1B) of the Income Tax Act.
Atal Pension Yojana (APY) is an initiative of the Government of India to include workers of the unorganised sector under the social security scheme. It allows workers to get fixed pensions INR 1,000, INR 2,000, INR 3,000, INR 4,000 and INR 5,000 per month from the age of 60. The pension is fixed based on the contributions made by the subscribers. Any individual with an age of 18 can join this scheme. However, the maximum age of joining the scheme is 40 as one can only contribute towards the account until the age of 40.
Section 80CCD (1) defines the rules related to deductions on NPS contributions made by individuals irrespective of whether they are government employees or private employees or self-employed individuals. Whereas, section 80CCD2 defines rules on employers’ contributions made towards NPS of an employee.
All deductions of Section 80C and 80CCD can be claimed at the end of the financial year while filing income tax returns with the Income Tax Department. However, individuals must show proof of the same.
National Pension Scheme under Section 80CCD deduction
National Pension Scheme is one of the popular retirement savings options in India. The Central Government of India and The Pension Fund Regulatory and Development Authority (PFRDA) regulate this voluntary scheme. The scheme has a dual purpose of investment and pension. Also, the interest rates of NPS are market-linked.
The scheme invests the investment amount across different market-linked instruments such as equity and debt securities. Hence, the performance of the scheme is market-linked. Also, NPS has a lock-in period until the subscriber’s retirement.
NPS allows premature withdrawals. However, there are certain conditions to comply with. Partial withdrawals up to 25% of the amount can be done only after three years of account opening. Moreover, partial withdrawals are allowed only for specific purposes such as severe illness, buying a home or for children’s education.
One can make periodic contributions to NPS. They will receive a portion of their investment amount as a lump sum, and the remaining has to be used to buy an annuity. Employees of private, public, and unorganised sectors can invest in NPS. However, employees of armed forces are not eligible to invest in NPS.
NPS investment provides tax benefits under Section 80CCD of the Income Tax Act. Investors can claim tax benefits up to INR 2,00,000 under Section 80CCD(1), Section 80CCD(2) and Section 80CCD(1B).
NPS offers the following investment choices for its subscribers:
Active: Under this type, an investor can choose how their funds are invested, on the basis of their personal preference.
Auto: Under auto investment choice, an investor doesn’t need to decide the asset classes and asset allocation. Instead, there are pre-defined portfolio options that change as per the age of the subscriber.
The National Pension Scheme NPS has two types of accounts. Following are the two types of NPS accounts:
Tier I Account
This Account type is a default and non-withdrawal permanent retirement account. Tier I account, allots the subscriber a unique identification number, Permanent Retirement Number (PRAN). The minimum investment amount for Tier I accounts is INR 500 and after that INR 1,000 or more every year. Also, the NPS account allows the subscriber to withdraw only 60% as a lump sum during retirement. The remaining 40% to be used to buy an annuity plan. The motive behind this is to ensure regular pension to the subscriber.
Tier 1 account investments fall under the Exempt-Exempt-Tax (E-E-T) regime. The investments and gains are exempt from tax. The investments up to 1,50,000 qualify for tax deduction under 80CCD(1) and 80CCD(2) (combined) of the Income Tax Act. Furthermore, an additional investment of 50,000 qualifies for tax deduction under Section 80CCD(1B) making the total deductions available to INR 2 lakhs.
Tier II Account
Tier II Account is a voluntary retirement cum saving account. However, one can open the account only if they have a Tier I account. In comparison to Tier I accounts, Tier II accounts offer more flexibility in terms of deposits and withdrawals. The minimum investment amount for a Tier II account is INR 1,000. Moreover, one can maintain a zero balance and it’s not compulsory to invest every year. Also, subscribers can invest or withdraw their fund anytime.
Furthermore, Tier II accounts don’t offer any 80CCD tax deductions for self-employed individuals and private sector employees. However, the account has a three-year lock-in period for government employees. They can also claim tax benefits for investments made into the Tier II account.
80CCD Tax Deductions
Section 80CCD of the Income Tax Act has the following two subsections:
Section 80CCD (1)
Subsection Section 80CCD1 defines the rules of income tax deductions available to the subscribers for their contributions made to the national pension scheme. The rules apply to all individual taxpayers investing in the scheme. In other words, irrespective of whether the contributions are made by a self-employed individual, government employee, or private employee. The provisions of the section 80CCD (1) apply to all Indian citizens contributing to the NPS and are between the age of 18 years to 60 years. Moreover, the provisions are also applicable to NRIs.
Following are the provisions of Section 80 CCD (1):
Maximum deduction acceptable under the section is 10% of the salary (basic + dearness allowance) or 10% of the gross income of the subscriber.
Since FY 2017-18, the permissible limit for self-employed individuals has been increased to 20% of the gross total income. However, the maximum deduction is capped at INR 1,50,000 for a financial year.
In the year 2015, the new amendment (subsection 1B) was introduced to Section 80CCD. The new provision recommends an additional deduction of INR 50,000. The additional deductions are available to both self-employed and salaried individuals. As a result, the total deduction available under Section 80CCD is INR 2,00,000.
Also, individual taxpayers can claim tax benefits under Section 80CCD subsection 1B over and above the deductions under Section 80CCD (1).
Section 80CCD (2)
Section 80CCD (2) comes into effect when an employer contributes to the NPS of an employee. Employers can also contribute towards NPS in addition to PPF and EPF contributions. Employer contributions can be equal to or higher than the contributions of an employee. Furthermore, the contributions under Section 80 CCD (2) apply only to salaried individuals and not self-employed individuals. Moreover, one can avail the deductions under Section 80 CCD (2) over and above the deductions of Section 80 CCD (1).
Salaried individuals can claim deductions up to 10% of their salary (basic pay plus dearness allowance). Or, equal to the contributions made by the employer towards the national pension scheme.
Conditions to claim deduction under section 80CCD
For claiming Section 80CCD deductions only if they fulfil the following conditions:
Both salaried, as well as self-employed individuals, can claim deductions under Section 80CCD. However, for government employees, it is mandatory; for others, it is voluntary.
The maximum amount of deduction available is INR 2 lakhs. This also includes the additional deduction of INR 50,000 available under section 80CCD1B
The total deduction available for individuals under Section 80C and Section 80CCD for NPS is INR 2 lakhs.
The money that one receives as monthly payments from NPS will be liable for taxation.
If one receives an amount from NPS and reinvests the same in an annuity scheme, then that amount is entirely exempt from tax.
One can claim deductions of Section 80C and 80CCD at the end of the financial year while filing income tax returns with the Income Tax Department. However, individuals must show proof of the same.
Following is the eligibility for claiming Section 80CCD deductions
- Citizens of India, as well as NRIs, can avail tax benefits under Section 80CCD
- Individuals taxpayers, both salaried and self-employed are eligible
- Hindu Undivided Family (HUF) do not qualify under this section
- Under Section 80CCD (1), the exemption limit is INR 1.5 lakhs. One can claim an additional exemption of INR 50,000 under Section 80CCD1B.
- An individual who is employed after 1st January 2004 by the Central Government can contribute up to 10% of the salary towards NPS.
- Individuals not employed by the Central Government can contribute a maximum of 10% towards NPS. Self-employed individuals can claim 20% on gross total income.