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A Detailed Guide to Section 80CCD of the Income Tax Act

Section 80CCD: Deduction Types, Subsections & Limits on Income Tax Deduction

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When choosing tax saving investments that maximize your benefits and one such option is to make investments towards making an adequate retirement corpus. Section 80CCD of the Income Tax Act provides such tax deduction benefits for individuals who are seeking to create a retirement corpus. Under 80CCD and its subsections, you can receive annual tax savings of up to Rs. 2 lakh by investments made into retirement plans,  National Pension Scheme (NPS) and Atal Pension Yojana (APY).

Read on to know the key features of Section 80CCD of the Income Tax Act and its various subsections. 

What is Section 80CCD of the Income Tax Act?

Section 80 CCD is a part of the Income Tax Act, 1961. This section specifies key tax benedits benefits for the investments made into long-term instruments specifically designed to create a corpus for retirement.

Further Section 80CCD has 2 key subsections 80 CCD (1) and 80CCD (2). These two subsections of 80CCD have different limits and benefits depending on the type of retirement investments that are made. 

The provisions specified in 80CCD(1) refer to contribution is made by self towards pension schemes such as retirement plans of life insurance companies, central/state government pension scheme, National Pension System (NPS), Atal Pension Yojana (APY), etc. Additionally, Section 80CCD (1B) has the provision of allowing an additional annual tax benefit of up to Rs. 50,000 on self contributions made towards pension schemes like NPS and APY.

Section 80CCD(2) specifies the tax benefits for employer contribution made towards pensions schemes like central/state government pension, Government NPS and Corporate NPS. One needs to keep in mind that Section 80CCD tax benefits are only available under the old tax regime and cannot be available under the New Tax Regime Section 115BAC. 

Section 80CCD Deductions Limits 

As already discussed, 80CCD is has two subsections: Section 80CCD(1) and 80CCD(2). Furthermore there is also Section 80CCD(1B) and each of this allows for different deduction limits. Below are the details of the annual tax deduction allowed under the various 80CCD sub-sections: 

Limits for Section 80CCD(1) Deductions

This deduction applies to salaried private and government sector employees making contributions towards central/state government pension schemes, NPS and APY. In the case of self-employed, NPS and APY contribution benefits are included u/s 80CCD (1).  An individual contributor to the above schemes can claim tax benefits of up to ₹1.5 lakh as part of the overall Section 80C annual limit under current rules.  

There are however a few conditions that may apply on the Section 80CCD (1) tax benefit limit, such as: 

  • Any private or government salaried employee cannot claim deductions of more than 10% of their salary u/s 80 CCD(1) even if the ₹1.5 lakh limit is not exceeded. Note that salary in this context means basic salary plus dearness allowance (if applicable). 
  • Self-employed individuals cannot claim more than 20% of their gross income as tax deduction under Section 80CCD(1) even if it does not exceed the overall ₹1.5 lakh limit. 

Deduction Limits Under Section 80CCD (1B)

The section came into being when Section 80CCD(1) was amended in 2015 to encourage more participation in pension schemes such as the National Pension System (NPS) and Atal Pension Yojana (APY). Section 80CCD(1B) allows an additional ₹50,000 to be claimed under tax benefits in the case of self contributions made into NPS and APY. This amount is over and above the ₹1.5 lakh tax saving limit under Section 80CCD(1) mentioned earlier. 

Therefore, the total deductions that may be allowed under Section 80CCD(1) for self contribution made towards retirement plans is ₹2 lakh annually. It is, however, essential to note that duplicate claims under Section 80CCD(1) and Section 80CCD(1B) are not allowed. 

Section 80CCD(2) Deduction Limits 

One of the most significant advantages salaried employees have over self-employed taxpayers is that they can enjoy tax savings against the pension fund contribution made by their employers. Currently, tax benefits on employer contribution towards pension plans are allowed in the case of state/central government pension plans, Government NPS account subscribers and Corporate NPS account holders.

A few important things to note in this regard are: 

  • Tax deduction benefit for employer contribution to corporate NPS account under Section 80CCD (1) is allowed up to 10% of the annual salary (basic + DA). 
  • On the other hand, state and central government employees can claim up to 14% of their salary (basic+DA) for employer contribution made into notified schemes under Section 80CCD.

The Section 80 CCD (2) benefits are over and above the combined ₹2 lakh annual limit u/s 80 CCD(1) and 80CCD(1B) mentioned above.  

Investments That Qualify for 80CCD Tax Benefits

As already mentioned earlier, Section 80CCD tax benefits can be availed only when some specific retirement planning focused investments are made. The following are key details regarding 2 of these long term investments : 

National Pension System

Originally introduced to replace the state and central government pension plans, National Pension Scheme was originally available to only State and Central Government employees. However, currently, any individual within the age group of 18-70 years can subscribe to the National Pension System (NPS). This retirement scheme consists of different types of market-linked investments across 4 asset classes – Equity, Corporate Debt, Government Bonds and Alternative Investment Funds.

  • NPS Tier 1 account provides the tax saving benefits of NPS on self-contribution up to Rs. 2 lakh annually to all subscribers under both Section 80CCD(1) and Section 80CCD(1B).
  • The tax benefits of Section 80CCD(2) can however only be availed by individuals subscribing to either the Corporate NPS or Government NPS schemes that feature contributions made by the employer.   

APY Benefits Under 80CCD

Atal Pension Yojana (APY) or Pradhan Mantri Pension Yojana offers individuals a minimum guaranteed retirement pension. The scheme aims to help workers from the unorganized sector. Like, NPS, the maturity amount is only payable at retirement i.e. after one attains the age of 60 years. As per current rules, APY offers a guaranteed pension of up to Rs. 5000.

Here are some things to remember for claiming tax benefits through APY under 80CCD: 

  • Contributions of up to ₹1.5 lakh under section 80CCD(1) are eligible for tax deductions. 
  • Self-employed individuals can also earn tax benefits up to ₹1.5 lakh under section 80CCD. 
  • Additional ₹50,000 can also be claimed under section 80CCD (1B).
  • At the time of death of the scheme holder, the maturity benefit is transferred to the spouse or any other nominee. The nominee can also withdraw the corpus or continue the contributions as pre-decided. 

Eligibility for Section 80CCD

You must meet certain terms and conditions to enjoy the tax deductions applicable under 80CCD of the Income Tax Act. Here are some conditions one needs to meet mandatorily: 

  • Salaried employees in private or public sectors and any self-employed individuals can claim 80CCD deductions. However, Hindu Undivided Families (HUFs) or other non-individual tax entities cannot claim benefits of Section 80CCD.
  • You must be over 18 years old.
  • You must hold a NPS Tier 1 account or be an APY subscriber to be eligible for tax savings under 80CCD.  
  • If you have accounts in NPS and APY, you can jointly apply for tax deductions that cannot exceed ₹1.5 lakh under section 80CCD(1) and section 80CCD(2). The same rule applies to ₹50,000 tax benefits under section 80CCD(1B). 

FAQs

Q. Can NRIs apply for 80CCD deductions? 

A. Yes, NRIs who have an account in NPS or APY are also eligible for tax benefits under Section 80CCD of the Income Tax Act, 1961. 

Q. Can we invest more than 2 lakh in NPS? 

A. Yes, you can invest more than ₹2 lakh in your NPS account as there is no upper limit on annual investment amount. However, the maximum tax benefit under 80CCD(1) and CCD (1B) can only be claimed up to ₹2 lakh and only on investments made into a NPS Tier 1 account. 

Q. Are Section 80CCD tax benefits included in Section 80C deduction limit? 

A. No, not all Section 80CCD tax benefits are included in the Section 80C annual cumulative limit of ₹1.5 lakh. While Section 80CCD (1) tax benefits are included as part of the overall Section 80C limit, Section 80 CCD (1B) benefit of up to Rs. 50,000 annually is over and above the Section 80C limit. Additionally 80 CCD (2) benefits of NPS are also tax benefits beyond Section 80C that are on offer.    

Q. Is there anyone who cannot claim deductions under Section 80CCD(1B)? 

A. Yes, non-individual tax payers like Hindu Undivided Families (HUFs) can’t claim tax savings u/s 80 CCD of the Income Tax Act. 

Q. What is the difference between Tier I and Tier II accounts of NPS?

A. The major difference lies in the tax benefits offered. Only NPS Tier I account provides Section 80CCD tax benefits while no such benefit is available on Tier II account investments.  

Sources:

https://www.npstrust.org.in/content/what-nps

https://economictimes.indiatimes.com/wealth/tax/how-to-get-a-tax-deduction-of-up-to-rs-9-5-lakh-just-by-investing-in-nps/articleshow/81545208.cms

https://cleartax.in/s/section-80ccd

https://scripbox.com/tax/section-80ccd/

https://www.etmoney.com/tax/section-80ccd-deductions

https://financialservices.gov.in/pension-reforms-divisions/Atal-Pension-Yojana

https://tax2win.in/guide/section-80-ccd-1b

ARN No: Dec22/Bg/9

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