Deductions Under Section 80CCD of Income Tax

Paying your income tax in an accurate and timely manner is crucial for the country’s economic growth. As a responsible citizen of India, you have to pay your taxes on time. The government has made several provisions in the Income-tax Act,1961 that allow you deductions against investments in specific avenues. One such popular option is deduction under Section 80CCD.

What is Section 80 CCD

The entire Section 80 CCD deals with tax benefits provided on the basis of contributions made to the pension fund schemes notified by the central government.

There are various sub-sections to Section 80CCD of the Income Tax Act. Apart from the sections mentioned above, there are a few sections that deal with how the money is treated, the tax treatment of premature withdrawals, and other rules and regulations regarding money deposited in your pension fund account.

80 CCD deduction is not limited to part 1 for the employees. There is an additional benefit available under section 80CCD(1B).

These income tax deductions sections are for investments made in a pension scheme notified by the central government. 80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme, whereas section 80CCD (2) deals with employer contribution to an employee’s pension account.

National Pension Scheme (NPS) is the scheme notified by the central government. The section 80CCD deals with tax deductions and reliefs given for contributions made to the pension fund account.

Deductions Under 80CCD(1) and 80CCD(2)

Section 80CCD has been further divided into two subsections.

80CCD(1): Contributions made by the employee/self (salaried or self-employed) to NPS.
80CCD(2): Contributions made by the employer towards NPS.

Section 80 CCD (1)

Section 80CCD1 allows every tax-paying individual in India to get tax deduction benefits from the amount you deposit in your NPS account. This tax benefit is open to both: employed and self-employed.

This section applies to all such individuals and is even open to NRIs aged between 18 to 60.

Your total 80CCD exemption limit reduces your total tax liability to the government.

However, there is a limit to how much you can claim under section 80 CCD (1), like all other income tax deductions given by the government.

For an employee, the amount should not cross 10% of the basic salary and dearness allowance (DA) in the financial year.
For the self-employed, the limit is 10% of their income up to Rs 1.5 lakh.

Section 80 CCD (2)

Section 80CCD 2 refers to a tax benefit for employers with respect to a contribution made to the pension scheme. If your employer contributes to your NPS account, your employer gets a tax benefit under section 80CCD 2. This tax benefit is limited to 20% of the total income of the employer in the previous year.

Sections 80CCD1 and (2) fall under the larger section 80CCD of the Income Tax Act, 1961. These sections were introduced in 2004 after the National pension Scheme (NPS) was introduced for the first time in the country.

National Pension Scheme under 80CCD

The Central Government introduced NPS to provide the benefit of an organized pension scheme to Indian citizens. Initially, NPS was meant for government employees only but was later opened for the private sector and self-employed individuals. The basic motive behind NPS is to help individuals create a retirement corpus and receive a fixed monthly payout to help them lead a comfortable life post-retirement.

Here are some of the major highlights of the NPS:

One must contribute to NPS until the age of 70 years. While it is mandatory for Central Government employees, it is voluntary for other individuals.
To be eligible for Income Tax deduction under the NPS Tier 1 Account, one must contribute a minimum of Rs 6,000 per annum or Rs 500 per month.
To be eligible for Income Tax deduction under the NPS Tier 2 Account, one must contribute a minimum of Rs 3,000 per annum or Rs 250 per month.
There is an option to choose from various investment options like Equity funds, Government bonds, Government securities, etc.
Partial withdrawals of up to 25% of the contribution made by an individual, subject to certain conditions, are allowed.
Individuals can withdraw up to 60% of the corpus as a lump-sum payout and have to invest the remaining 40% in an annuity plan.
It is one of the cheapest equity-linked investment options in the market.

Atal Pension Yojana (APY) under 80CCD

APY, or Pradhan Mantri Pension Yojana, is a retirement-oriented government scheme that guarantees a minimum pension payment to investors after retirement. It is open to investment from 18 to 40 years, as it requires a minimum period of 20 years before payments start at the age of 60 years. Premature withdrawals are also permitted in certain cases, but the investor chooses a pension amount ranging from Rs 1,000 to Rs 5,000 per month on retirement. Some other features of APY are:

Tax deductions up to Rs 1.5 lakhs are eligible under section 80CCD (1).
Like NPS, an additional investment of up to Rs 50,000 is eligible for tax deduction under section 80CCD (1B).
On the death of the investor, the spouse can receive payments.
On the premature death of the investor before the age of 60 years, the spouse can withdraw the entire corpus or continue with the scheme.
Self-employed individuals can claim a deduction of a maximum of Rs 1.5 lakhs for APY investments that are up to 20% of their annual income.

Conditions for Deductions under Section 80CCD

Deductions under Section 80CCD are available to salary as well as self-employed individuals. While it is mandatory for government employees, for other individuals, it is voluntary.
The maximum deduction limit available under Section 80CCD is Rs 2 lakhs; this includes the additional deduction of Rs 50,000 available under 80CCD(1B).
Tax benefits availed under Section 80CCD cannot be claimed again under Section 80C, i.e. the combined deduction under Section 80C and 80CCD cannot exceed Rs 2 lakhs.
The money received from NPS as monthly payments or surrendered accounts will be liable for taxation as per the applicable provisions.
Any amount received from NPS reinvested in the annuity plan is entirely exempt from taxation. The deductions available under Section 80CCD can be claimed at the end of the financial year when you file your income tax returns. You will be required to produce proof of payment to be eligible for this deduction.

FAQs

What exactly is Section 80CCD(2) of the Income Tax Act?

Section 80CCD (2) permits salaried individuals to deduct up to 10% of their salary, which includes basic pay and dearness allowance, or the amount equal to the employer’s payments to the NPS.

Eligibility to claim Section 80CCD Deductions?

Individual assesses who are both salaried and self-employed.
Every citizen of India, including NRIs, may avail of tax benefits under this section.
Hindu Undivided Family is not eligible for tax benefits and deductions under this section.
Deductions under Section 80CCD(1) are capped at INR 1.5 Lakhs. However, an additional deduction of up to INR 50,000 may be claimed under Section 80CCD(1B), bringing the maximum deduction limit to INR 2 Lakhs.
Income tax assesses employed by the Central Government on or after January 1, 2004, may contribute 10% to 14% of their annual salary (Basic Salary + Dearness Allowance) towards the NPS.
Salaried employees not employed by the Central Government could contribute 10% of their annual salary (Basic Salary + Dearness Allowance). At the same time, self-employed tax assesses could claim deductions of up to 10% of their gross income during the Financial Year 2016–17. However, since the Financial Year 2017–18, the deduction limit has been increased to 20%.

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