Accurate and timely payment of income tax is essential for the country's economic development. As a responsible citizen of India, it is essential to pay taxes promptly. The Income Tax Act of 1961 includes provisions for tax deductions on investments made in certain areas. One such popular option is the deductions offered under Section 80CCD.
What is Section 80CCD?
Section 80CCD refers to the tax deductions available to individuals for contributions made to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). Employer contributions to the NPS also fall under this section, as the NPS is a pension scheme approved by the Central Government.
National Pension Scheme under 80CCD
The Central Government introduced the National Pension Scheme (NPS) to offer a structured pension plan to Indian citizens. Initially, the NPS was only for government employees but became available for private sector employees and self-employed individuals. The goal of NPS is to assist individuals in building a retirement fund and providing a steady monthly income during their post-retirement years.
Subscribers working in the corporate sector can avail of an additional tax benefit under section 80CCD (2) of the Income Tax Act. Contributions made by the employer to the NPS account of the employee, up to 10% of their salary (basic + DA), are eligible for deduction from taxable income, up to a limit of 7.5 lakh.
Key Features of the National Pension Scheme (NPS):
1. Contributions to NPS must be made until the age of 65 years. While it is mandatory for Central Government employees, it is voluntary for other individuals.
2. To be eligible for tax deductions under the NPS Tier 1 Account, a minimum contribution of ₹6,000 per year or ₹500 per month is required.f
3. To be eligible for tax deductions under the NPS Tier 2 Account, a minimum contribution of ₹2,000 per year or ₹250 per month is required.
4. Various investment options are available, including Equity funds, Government bonds, and Government securities.
5. Partial withdrawals, up to 25% of the individual’s contribution, are allowed subject to certain conditions.
6. Upon reaching retirement, individuals can withdraw up to 60% of their corpus as a lump sum and must invest the remaining 40% in an annuity plan.
7. NPS is one of the most affordable equity-linked investment options available in the market.
Atal Pension Yojana (APY) Under 80CCD
The Pradhan Mantri Pension Yojana (APY) is a government-run retirement scheme that provides a guaranteed minimum pension to investors after retirement. The scheme is open for investment from 18 to 40 years, with a minimum investment period of 20 years before payments begin at age 60. While premature withdrawals are allowed in certain cases, the investor selects a monthly pension amount ranging from 1000 to 5000.
Other key features of the APY include:
1. Eligibility for tax deductions up to ₹1,50,000 under Section 80CCD(1)
2. Additional investments of up to ₹50,000 are eligible for tax deduction under Section 80CCD(1b), similar to NPS
3. In the case of the investor’s death, the spouse can receive payments.
4. In the event of the premature death of the investor before age 60, the spouse can choose to withdraw the entire corpus or continue with the scheme.
5. Self-employed individuals can claim a deduction of up to ₹1,50,000 for APY investments, up to 20% of their annual income.
Categorising 80CCD
Section 80CCD has been divided into two subsections to clearly understand the tax deductions available to individuals. One subsection covers tax deductions for salaried and self-employed individuals, while the other deals with contributions made by employers to the National Pension Scheme (NPS). The following is a detailed explanation of these two subsections of 80CCD.
This section, 80CCD(1), defines the tax deductions available to individuals for contributions to the National Pension Scheme (NPS). It covers all Indian citizens and NRIs between the ages of 18 to 65 contributing to NPS, whether as government employees, private employees, or self-employed individuals. The key provisions of 80CCD(1) include:
- The maximum deduction is 10% of the salary (including basic + DA) or 10% of the individual’s gross income.
- For self-employed individuals, the limit has been increased to 20% of their total gross income with a cap of Rs 1,50,000 per financial year.
Section 80CCD (1)
In the 2015 Union budget, an amendment was introduced as sub-section 80CCD(1B), allowing individuals to claim an additional deduction of ₹50,000. This applies to salaried and self-employed individuals, raising the maximum deduction under 80CCD to ₹2,00,000. The tax benefits of 80CCD(1B) can be claimed in addition to those available under 80CCD(1).
Section 80CCD (2)
Section 80CCD (2) of the Income Tax Act pertains to employer contributions towards an employee’s NPS account. Only salaried individuals, not self-employed individuals, can benefit from this section. The employer can contribute an amount equal to or higher than the employee’s contribution. The tax deduction available under this section is up to 10% of the employee’s salary (basic pay and dearness allowance) or equal to the employer’s contribution to NPS. This can be claimed in addition to the deductions available under Section 80CCD (1).
Conditions for Section 80CCD Tax Deduction
The following are the conditions for claiming deductions under Section 80CCD:
1. Both salaried and self-employed individuals can avail of the deductions, with government employees required to do so
2. The total deduction limit under Section 80CCD, including the additional deduction of ₹50,000 under subsection 1B, is capped at ₹2 lakhs
3. Deductions under Section 80CCD cannot be claimed in conjunction with those under Section 80C, with the combined limit not exceeding ₹2 lakhs.
4. Monthly payments or surrendered accounts from NPS are taxed as per current regulations.
5. Reinvesting NPS funds in an annuity plan is tax-exempt.
The deductions can be claimed while filing income tax returns, with proof of payment required to be provided.
