Taxes are a necessary part of adulthood. Every citizen who makes more than a particular amount of money, whether from a job, being self-employed, or starting their own business, is required to pay taxes. Nevertheless, the government has developed a number of tax deductions and exemptions under Section 80 of the Income Tax Act, 1961, in order to lower a person's tax payment.

Amongst the various sub-sections under Section 80, one of these is Section 80CCD, which deals with any payments a person makes to particular pension plans that the Indian government has made known. Not only does this aid in tax savings, but these pension plans also promote retirement savings.

What is Section 80CCD?

As per the Income Tax Act of 1961, Section 80CCD enables tax deductions for the payments made by an individual to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). The provisions of Section 80CCD also apply to the NPS payments made by employers towards their employees.

The Central Government of India established the National Pension Scheme as an inexpensive pension plan for Indian citizens. The program is open to private sector employees as well as the self-employed individuals in addition to government employees. The NPS's mission is to assist people in starting retirement accounts so they can live comfortably in the future.

Investments that Come under Section 80CCD

The list of investments that qualify for income tax deductions under Section 80CCD of the Income Tax Act is as follows. When submitting your income tax returns, you can claim these deductions.

  • Tax deductions under Section 80CCD are available for all contributions made by individuals to the National Pension Scheme and Atal Pension Yojana.
  • All contributions made to the National Pension Scheme by employers towards their employees.

Section 80CCD Tax Deductions and Limit

The list of income tax deductions under Section 80CCD and the maximum deduction allowed is as follows:

  • The maximum money that can be deducted under Section 80CCD is ₹2,000,000. This sum includes the extra ₹ 50,000 deduction permitted under Subsection 1B of Section 80CCD.
  • Any tax benefits or deductions taken advantage of under Section 80CCD cannot be used again under Section 80C. The total combined deduction allowed under Sections 80CCD and 80C cannot exceed ₹ 20,00,000.
  • The appropriate tax bracket will be applied to the money received from the National Pension Scheme after retirement or from surrendered accounts.
  • Any money received from your NPS and reinvested into an annuity plan will continue to be completely tax-exempt.

Subsections under Section 80CCD

As per the provisions of the Income Tax Act, Section 80CCD has been further divided into two subsections, one of which focuses on contributions to the NPS made by individuals and the self-employed, and the other of which focuses on contributions made by employers. The two sections of the Income Tax Act's 80CCD are as follows:

  1. Section 80CCD(1)

    Employed and self-employed people who make contributions to the National Pension System and the Atal Pension Yojana are eligible for a deduction under Section 80CCD (1) of the Income Tax Act. Anyone over the age of 18 who makes contributions to an NPS account or an Atal Pension Yojana scheme is eligible to claim a deduction of up to ₹1, 50,000 annually under this Section. This also applies to NRIs Having said that, this is dependent on the following:

    • An employee in the public or private sector cannot deduct more than 10% of their salary in NPS or APY contributions. Salary in this context refers to basic pay plus a dearness allowance.
    • The maximum limit applicable to self-employed people is set at 20% of their gross income.
  2. Section 80CCD (1B)

    The government introduced a new Subsection 80CCD (1B) to Section 80CCD as an amendment in the 2015 Union Budget. This was done to increase investment in the Atal Pension Yojana and NPS programs. When making contributions to NPS or the Atal Pension Yojana, people who are employed or self-employed can deduct an extra ₹ 50,000 under Section 80CCD (1B). This deduction is in addition to the maximum allowed under Section 80CCD (1). Make sure there isn't a duplicate claim while making this claim, meaning avoid claiming the same contribution amounts under two different Sections.

  3. Section 80CCD (2)

    Employer’s contributions to pension plans like NPS are an extra benefit that salaried people may take use of. Employed people have the option of claiming income tax deductions for contributions made by their employer under Section 80CCD (2) of the Income Tax Act. It is dependent on the following conditions:

    • Employees in the private sector are eligible to deduct up to 10% of their gross pay (base salary plus dearness allowance) under Section 80CCD (2)
    • Government employees are permitted to claim up to 14%

National Pension System under Section 80CCD

Section 80CCD of the Income Tax Act allows taxpayers to claim tax deductions for contributions made to the National Pension System (NPS). NPS is a retirement tool that was introduced to the citizens for the first time in 2004. In the beginning it was only intended for government workers, but in 2009 it became open to everyone.

Now, anyone over the age of 18 who works in the public or private sector or who is self-employed can invest in NPS. NPS is a market-linked tool that is managed by investment professionals that spread their capital over four different asset classes. Investments in NPS are often restricted until retirement or the superannuation age of 60 years. Individuals have the option to continue investing up until 70 years of age.

The following are a few must know pointers about NPS:

  • The optional retirement benefit programme that is NPS is available to all but central government employees i.e for central government employees it in mandatory not voluntary.
  • Due to the tax advantages of NPS investments, many people opt to make them.
  • Under Section 80CCD, NPS donations are eligible for tax deductions of up to ₹ 2,00,000.
  • Tier I and Tier II are two different accounts to which NPS contributions can be made. Only contributions to Tier I accounts are eligible for NPS tax deductions for employees working in the private sector. Both Tier I and Tier II payments are eligible for NPS tax deductions for employees of the public sector.
  • Up to 60% of the NPS fund may be withdrew tax-free at maturity. The purchase of annuities must be done with the remaining 40%. Even this sum is exempt from taxes. Since payments made, interest generated, and maturity amounts are tax-free, the NPS tax benefit is exempt-exempt-exempt (triple tax exemption).

Atal Pension Yojana under Section 80CCD

Another government-backed retirement programme that offers investors a minimum guaranteed pension upon retirement is the Atal Pension Yojana (APY), sometimes referred to as the Pradhan Mantri Pension Yojana.

The unorganised sector is the target audience for this pension yojana. Anyone between the ages of 18 and 40 may apply for this pension programme. Similar to NPS, APY contributions are restricted until 60 years of age, with early withdrawals allowed in certain situations. Benefits from Atal Pension Yojana for taxes are comparable to NPS tax benefits.

The following are a few must know pointers about APY:

  • Tax deductions for APY payments up to ₹ 1,50,000 are allowed per Section 80CCD(1).
  • As long as their yearly income is not more than ₹ 1,50,000, self-employed people can deduct up to 20% of it from their APY investments.
  • Similar to NPS, a second investment up to ₹ 50,000 in APY is also eligible for a deduction under Section 80CCD (1B).
  • Subscribers might be subjected to receive guaranteed monthly pensions of ₹ 1000, ₹ 2000, ₹ 3000, ₹ 4000, or ₹ 5000 depending on the amount of contributions paid. Nevertheless, this pension income is taxed.
  • If a subscriber passes away, their partner will be eligible to the pension in their place. A subscriber's partner has two options if they pass away before they age 60: they may either end the plan by withdrawing the full amount, or they can continue it in their name and continue receiving the pension. In light of this, APY also offers the benefit of giving dependents a lump amount in the event of death.

Eligibility criteria for Section 80CCD

The Income Tax Act's Section 80CCD eligibility requirements are as follows:

  • Section 80CCD applies to any salaried or self-employed person who contributes to the National Pension Scheme or Atal Pension Yojana.
  • Section 80CCD applies to any business or organization that makes contributions on behalf of its employees to the National Pension Scheme.
  • A minimum of ₹ 6,000 per year or ₹ 500 per month must be invested in the NPS in order to qualify for Section 80CCD tax deductions under NPS Tier 1 Account.
  • A minimum of ₹ 2,000 annually or ₹ 250 per month must be given to the NPS in order to qualify for Section 80CCD deductions under NPS Tier 2 Account.

Terms and Conditions for Claiming Tax Deductions under Section 80CCD

Here are some factors to bear in mind while claiming tax deductions under Section 80CCD:

  • Both self-employed individuals and those working in the public and private sectors are eligible to deduct the applicable investments under Section 80CCD.
  • Both National Pension Scheme and Atal Pension Yojana contributions are eligible for Section 80CCD deductions.
  • The total combined deduction limit for Sections 80C, 80CCC, 80CCD (1), and 80CCD (1B) is ₹ 2,00,000.
  • For self-contributions made to NPS or APY, Section 80CCD (1B) allows for an additional deduction of ₹ 50,000.
  • Once a deduction has been claimed under Section 80CCD (1), it cannot be claimed again under Section 80CCD (1B) or Section 80C.
  • Income tax will apply to the pension payments from NPS/APY investments that are received after retirement. The amount spent to buy annuities and the corpus at maturity, however, will be entirely tax-free.
  • When submitting income tax returns, deductions allowed under Section 80CCD may be claimed. Though, you might be asked to provide proof for the same.

Examples

Example 1

Mr. Sharma is a Central Government employee. He contributes ₹ 70,000 to his NPS account. The following is his salary structure:

  • Basic Salary – ₹ 2, 20,000
  • Dearness allowance – ₹ 80,000
  • Other Allowances and Perquisites – ₹ 2, 00,000
  • Investments under Section 80C – ₹ 80,000

Now, he can claim only ₹ 30,000 under Section 80CCD (1), i.e., lower of the following:

      • NPS contribution is ₹70,000
      • 10% of basic and dearness allowance is ₹ 30,000
      • Restricted to unexhausted limit of Section 80C of ₹ 70,000 (₹ 1,50,000 – ₹ 80,000).

Assuming that the investments made in the aforementioned example fell within the scope of Section 80C and totaled ₹ 1,20,000, the deduction allowed under Section 80CCD(1) would be limited to the amount that still falls within Section 80C that is ₹ 30,000.

Example 2

Mr. Dhingra is a Central Government employee. A total contribution of ₹ 60,000 has been made to his NPS account. Of this ₹ 60,000 - the 50% is contributed by him that is ₹ 30,000 and 50% is contributed by his employer at is remaining ₹ 30,000. The following is his salary structure:

  • Basic Salary – ₹ 2,20,000
  • Dearness allowance – ₹ 80,000
  • Other Allowances and Perquisites – ₹ 2,00,000
  • Investments under Section 80C – ₹ 80,000

Now, Mr. Dhingra can claim ₹ 30,000 under Section 80CCD (1) that is the lower of the following:

      • NPS contribution by Mr. Dhingra is ₹ 30,000
      • 10% of basic and dearness allowance is ₹ 30,000
      • Restricted to unexhausted limit of Section 80C of ₹ 70,000 (₹ 1,50,000 – ₹ 80,000).

He may, however, also claim tax deduction for the employer's NPS account contribution. Employer NPS contribution is ₹ 30,000. The highest employer contribution deduction permitted is ₹ 42,000 (14 percent of basic and dearness allowance). So, Mr. Dhingra is eligible to make an additional ₹ 30,000 deduction under Section 80CCD (2). The amount of the employer's contribution that may be deducted under Section 80CCD (2) has no restrictions.

Conclusion

You can benefit from a sizable deduction on your taxable income thanks to Section 80CCD of the Income Tax Act. Before starting the process right away, do your study because the taxes structure is subject to changes. Moreover, to save more taxes using Section 80C of the Income Tax Act, connect with a trusted financial advisor today!