Section 80CCD1B of the Income Tax Act was brought into the ambit of section 80 CCD with effect from April 1, 2016. According to the Income Tax Act, all individuals who are eligible for claiming tax deduction under section 80CCD 1 can claim an additional deduction of Rs 50,000 for their contribution to pension schemes.
What is Section 80CCD (1B)?
Section 80CCD (1B) is a provision under the Income Tax Act, 1961 in India that allows you to claim an additional deduction of up to ₹50,000 from your taxable income for contributions made to the National Pension System (NPS). This NPS tax benefit is over and above the ₹1.5 lakh limit available under Section 80C.
Who all are eligible?
- Employed
- Self-employed
- NRIs
Contribution to the pension fund scheme gets you tax benefits across three sections:
Section 80 CCD(1): Rs 1.5 lakh. This section is a part of section 80C. Note that the limit provided under section 80CCCD(1) has to be read along with section 80C. The tax deduction limit across sections 80C, 80CCD (1), and 80CCC together is Rs 1.5 lakh and not individually.
Section 80 CCD(1B): The 80CCD1B limit is Rs 50,000. This is an additional benefit.
Eligibility Criteria for Section 80CCD (1B) Deductions
The following subscribers are eligible to avail of the deductions under Section 80CCD(1B):
Category of Eligible Subscribers:
Employed individuals
Self-employed individuals
Non-Resident Indians (NRIs)
Age Criteria: 18 – 70 years of age
Tier I Account: Contributions must be made to the Tier I NPS account.
Contribution Type: Applies only to self-contributions, not employer contributions.
Important Points to Note About Sec 80CCD (1B)
Total deductions under Section 80C + 80CCC + 80CCD (1) is up to ₹1.5 lakhs.
The ₹50,000 deductions under Sec 80CCD (1B) are independent of the above mentioned ₹1.5 lakhs.
Hence, the total NPS tax benefits you can claim is a total of ₹1.5 lakhs + ₹50,000, i.e., ₹2 lakhs.
Overview of the NPS Scheme
NPS Investments: The contributions made to the NPS Account are invested in various market-linked investments like equities, debt securities, and Money Market Instruments (MMIs).
NPS Returns: The returns from your NPS contributions are market-linked, which generally lies between 9 – 15% p.a., depending on the market performance.
Investment Choices: Your NPS contributions can be managed with the Active Choice and Auto Choice accounts.
Active Choice: It allows you to actively choose the asset allocation of your NPS Account between debt funds, equities, and MMIs.
Auto Choice: This choice allows government-mandated levels for asset allocation, which is decided based on your age. The aggressive, moderate , and conservative Life Cycle Modes are available with this investment choice.
The National Pension Scheme Accounts
There are two types of NPS accounts
Tier 1 Account: A tier 1 account is one where you get tax benefits. This is the primary account with retirement benefits. This section applies as National Pension Scheme 80CCD and 80CCD (1B). This is the regular NPS account that we have talked about in this space.
Tier 2 Account: A tier 2 account is more like voluntary savings account with no restrictions that are applied to a tier 1 account. Restrictions on withdrawal, minimum investment every year are not present in this account. However, the catch is you can open a tier 2 account only when you already have a tier 1 account.
Withdrawal and Annuity Rules
Accordingly, there will be a corpus ready at the age of 60 on the basis of all the yearly contributions you have made. You can withdraw 60% of that corpus and 40% of it necessarily has to be in an annuity plan. The 60% amount can be withdrawn lump-sum and is tax-exempt. The balance of 40%, which is the annuity, is taxable in the year of receipt.
At the time of premature withdrawal, you can take only 20% of the corpus out which is also taxable. Rest 80% has to be put back into the annuity plan. Both, the withdrawal and receipt of the amount from the annuity plan are taxable.
Premature withdrawal is not allowed for any and every kind of expenditure. Pension Fund Regulatory and Development Authority of India (PFRDA) has given out certain guidelines.
Other Types of 80CCD Deductions
Section 80CCD (1)
Section 80CCD(1) of the Income Tax Act provides for a deduction for employees and self-employed individuals who contribute to the National Pension System and the Atal Pension Yojana. Any individual over the age of 18 who contributes to an NPS account or an Atal Pension Yojana scheme can claim a deduction of up to Rs. 1,50,000 per year under this clause. However, the following conditions must be met:
- Employees in the public or private sectors are not permitted to contribute more than 10% of their salaries to NPS or APY. Salary in this context refers to the basic salary plus the dearness allowance.
- The limit for self-employed individuals is 20% of their gross income.
Section 80CCD (2)
Salaried people may have the added benefit of their employer contributions to their pension plans, such as NPS. Section 80CCD(2) of the Income Tax Act allows employed individuals to claim income tax deductions for employer contributions. It is conditional on the following:
- Employees in the private sector can deduct up to 10% of their compensation (base salary + dearness allowance) under Section 80CCD(2).
- Employees of the government are eligible for up to 14%.
Difference Between Section 80CCD (1) and 80CCD (1B)
| Criteria | Section 80CCD (1) | Section 80CCD (1B) |
| Eligibility | Salaried and self-employed individuals | Salaried and self-employed individuals |
| Maximum Deduction | Up to 10% of salary (for salaried) or 20% of gross income (for self-employed), capped at ₹1.5 lakh | ₹50,000 (additional to Section 80CCD (1)) |
| Combined with Section 80C | Yes, part of the ₹1.5 lakh limit | No, separate from Section 80C limit |
| Applicability | NPS Tier 1 and Atal Pension Yojana | NPS Tier 1 only |
| Eligibility | Salaried and self-employed individuals | Salaried and self-employed individuals |
FAQs
What is Section 80CCD(1B)?
Section 80CCD(1B) of the Income Tax Act allows individuals to claim an additional tax deduction for contributions made to the National Pension Scheme (NPS). This is an extra benefit over and above the deduction of ₹1.5 lakh available under Section 80C and 80CCD(1).
How much can I claim under Section 80CCD(1B)?
Under Section 80CCD(1B), an individual can claim an additional deduction of up to ₹50,000 for contributions made to the NPS. This is over and above the ₹1.5 lakh limit under Section 80C.