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.
What are the major highlights of the National Pension Scheme under section 80CCD?
NPS has become a popular investment product in recent years. The scheme was initially opened only to government employees but has now been opened for self-employed and private sector employees as well. It allows the investors to create a long-term corpus that will help them lead a stable life post-retirement.
Below are a few highlights of the National Pension Scheme:
- Contribution to the NPS is mandatory until 60 years of age in the case of central government employees. It is optional for the rest of the individuals.
- As per section 80CCD(1), the maximum deduction is restricted to 10% of the salary in the case of an employee. The deduction in the case of self-employed individuals is restricted to 20%.
- Section 80CCD(1B) provides for an additional deduction of up to Rs. 50,000 of the amount paid by an individual assessee under NPS, despite any earlier deduction claimed under section 80CCD(1).
- Deduction under section 80CCD(1) is subject to the overall limit of Rs. 1,50,000 under section 80CCE. The deduction under section 80CCD(1B) is in addition to the limit of Rs. 1,50,000.
- The employer’s contribution would be included in the salary of the employee. Deduction under section 80CCD(2) would be restricted to 14% of the salary in the case of a contribution made by the central government. The same is restricted to 10% of salary in case of a contribution made by any other employer.
- The limit of Rs. 1,50,000 under section 80CCE does not apply to the employer’s contribution to the pension scheme under section 80CCD(2).
- There are two types of accounts under NPS, Tier 1 and Tier 2. In order to claim the deduction under section 80CCD, investors must contribute a minimum amount of Rs. Rs. 6000 per year or Rs. 500 per month in the account.
- A partial or complete withdrawal is allowed under NPS. However, in the case of a lump sum withdrawal, 40% has to be invested in an annuity plan.
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
The provisions of section 80CCD of the Income Tax Act can further be divided into the below:
Section 80CCD (1)
As per the provisions of section 80CCD(1), the deduction can be claimed by the subscribers for their contributions made to the national pension scheme. The provisions are applicable to all individual taxpayers investing in the scheme. Thus, in effect, the provisions of section 80CCD(1) are applicable to a self-employed individual, employees working in a private organization, and government employees. The provisions are also applicable to non-resident Indians.
The maximum deduction is restricted to 10% of the salary in the case of an employee. The deduction in the case of self-employed individuals is restricted to 20%.
In the year 2015, the new amendment (subsection 1B) was introduced to Section 80CCD which allows for an additional deduction of up to INR 50,000. The additional deductions are available to both self-employed and salaried individuals. Deduction under section 80CCD(1) is subject to the overall limit of Rs. 1,50,000 under section 80CCE. The deduction under section 80CCD(1B) is in addition to the limit of Rs. 1,50,000.
Section 80CCD (2)
The provisions of section 80CCD(2) take effect when the employer is making a contribution towards the NPS of the employee. The employers can make these contributions in addition to PPF and EPF contributions. The contribution made by the employer can be equal to or higher than the contributions of an employee. It is to be noted that the contributions under Section 80 CCD (2) apply only to salaried individuals and not self-employed individuals. Moreover, the deductions under Section 80 CCD (2) can be availed 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).
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.
The subscribers can submit the transaction statement which they can get from their investment platform as investment proof. Alternatively, the subscribers can also download the receipt of the contributions made from the NPS login. The same can be downloaded from the submenu “Statement of Voluntary Contribution under National Pension System (NPS)” available under the main menu “View” in NPS account log-in.
In the case where the subscriber attains the age of 60, up to 40% of the total corpus withdrawn in lump-sum is exempt from taxation. Let us understand this with the help of an example. Suppose the total corpus at the end of 60 years for Mr. A is Rs. 20 lakhs. Mr. A can withdraw 8 lakhs, being 40% of 20 lakhs without paying any tax.
The subscriber can partially withdraw from an NPS tier I account before the age of 60 for specified purposes.Post-2017, the amount withdrawn up to 25 percent of subscriber contribution is exempt from tax.
The amount invested in the purchase of an annuity plan is fully exempt from tax. However, the receipts in the subsequent years will be subjected to income tax.
Section 80CCD is a subsection of Section 80C. Section 80CCD is for deductions under the National Pension Scheme (NPS) for the employee and employer’s contributions. It also includes voluntary self-contribution made by the employee. The maximum deduction available under Section 80C and 80CCD is INR 1.5 lakhs. There is also an additional INR 50,000 available under Section 80CCD(1b) for contribution to Atal Pension Yojana and self-contribution to NPS.
The maximum deduction allowed under Section 80C of the Income Tax Act 1961 is INR 1.5 lakhs. One can deduct the expenses and investments they made from the allowed INR 1,50,000. The expenses allowed under this section are stamp duty and registration of a new house, home loan EMIs, children’s tuition fee, and LIC premiums. After deducting these expenses, if there is any excess left. Then one can invest in the allowed list of investments based on their goals and risk profile. The investments allowed under Section 80C are PPF, EPF, ELSS funds, SSY, NSC, SCSS, ULIPs, tax-saving FDs, and infrastructure bonds.