The Income Tax Act, 1961 gives taxpayers a lot of relief from tax liability through deductions given that the taxpayers file and pay the tax before the due date. Section 80 of the ITA,1961 comprises of various income tax deductions and the best way to make the most out of these deductions is to plan your taxes and investments. While there are multiple investments with limits on contributions which shall be allowed as a deduction, the Section 80CCD pertains to contributions to the National Pension Scheme or Atal Pension Yojana. The salary slabs don’t affect the deductions for individual income tax and are taken by all taxpayers up to the limit specified.
The Two Subsections of 80CCD
In order to make Section 80CCD more comprehensible, it is split up into two sections: one deals with the employer contributions to NPS while the other clarifies tax deductions for self-employed and salaried class.
Subsection 1: Section 80CCD (1)
Here are some highlights of this subsection:
- Deals with the details of IT deduction for contributions made towards NPS by self- employed, government and private employees
- All individuals aged between 18-60 years — including NRIs — contributing towards NPS have to adhere to the provisions under this subsection
- 10% of gross income or 10% of basic & DA are the thresholds for deduction under this subsection
- For self-employed class, the limit, 10% of gross income, has been raised to 20%. However, the cap of INR 1,50,000 has been placed for any FY
- A new subsection (1B) provides self-employed and salaried individuals with an additional deduction amounting to INR 50,000. This effectively raises the 80CCD maximum deduction limit to INR 2,00,000. In fact, tax benefits under (1B) can be claimed over and above the deduction under 80CCD(1)
Subsection 1: Section 80CCD (2)
Here are some highlights of this subsection:
- Only applies to salaried employees
- For employers contributing to NPS, EPF, and PPF of an employee
- Employer contribution can exceed or be at par with employee contribution
- Employees can claim deductions for a contribution at par with employer contribution or 10 % of Basic + DA
- 80CCD (2) deductions can be claimed over and above deductions under 80CCD(1)
What are the investments available to claim the 80ccd income tax deduction?
A Few Key Details about NPS under Section 80CCD
Here are some must-know facts about the National Pension Scheme (NPS).
|Contribution towards NPS until 60 years||The contribution is voluntary for all except Central Government employees.|
|Multiple investment options||Government bonds, securities, equity funds and so on can be chosen.|
|Eligibility for NPS Tier 1 IT deduction||The contribution must be a minimum of INR 500 per month or INR 6000 per annum.|
|Eligibility for NPS Tier 2 IT deduction||The contribution must be a minimum of INR 250 per month or INR 2000 per annum.|
|Partial withdrawals||Subject to terms and conditions; up to 25% of contribution can be withdrawn.|
|Withdraw and invest||Up to 60% of the contribution can be withdrawn, and the rest (40%) has to be invested in an annuity plan.|
|Pocket-friendly||One of the most affordable equity-linked investment option.|
Investment in Atal Pension Yojana (APY)
The Atal Pension Yojana was brought about recently by the government as a risk-free pension plan with a guaranteed pension for investors to relieve those working in unorganised sectors with no retirement plans in place. The APY doesn’t give the investor autonomy of choosing their investments but guarantees a pension after retirement. This is open for investors who are Indian residents of the age of 18 years- 40 years only. Cap on Investment: You can invest a maximum of Rs.5000 per month in APY
Section 80CCD Deduction Terms and Conditions
Given below are some notable terms and conditions for deductions under Section 80CCD
- Deductions are available to individuals drawing income from salary or self-employment. NPS contribution is compulsory for Central Government employees and voluntary for others.
- Deduction ceiling under 80CCD of INR 2 lakh; INR 50,000 additional deduction under 80 CCD(1B)
- The total deduction under 80CCD and 80C cannot exceed INR 2 lakh
- Matured funds gained via NPS withdrawal on a monthly basis or a surrendered NPS account is taxable under the Exempt-Exempt-Taxed (EET) rule of the taxation system But NPS funds rerouted to an annuity plan is tax-exempt
- Section 80CCD deductions can only be claimed when filing IT returns at the end of the financial year
- Proof to support NPS contribution must be provided to claim the deduction
- Online ITR filing on the IT portal will auto-retrieve 80CCD deduction from Form 24Q
Frequently Asked Questions
1. Are HUFs eligible to claim deductions under Section 80CCD?
No. As per the rule, only individuals can claim Section 80CCD deductions.
2. Are multiple NPS accounts allowed?
Multiple NPS accounts aren’t allowed. An NPS account for each employee — that’s the rule. However, you can have Atal Pension Yojana (APY) account along with your NPS account.
3. Under the National Pension Scheme, can an individual avail Section 80CCD deduction for contributions made towards NPS Tier II account?
The rule states that Section 80 CCD deductions can only be claimed for NPS Tier 1 accounts.
4. For a self-employed individual with an NPS Tier 1 account, what are the various documents that need to be submitted to claim Section 80 CCD deduction benefits?
As proof of investment, you can submit your statements that validate the veracity of your transactions. Furthermore, receipts that prove the voluntary contributions made towards Tier 1 account for a particular financial year can be downloaded from the NPS portal, under the “Statement of Voluntary Contribution under National Pension System (NPS)” tab which will also stand as proof of investment.
5. Are NRIs eligible to open NPS accounts?
NRIs aren’t barred from opening NPS accounts. But do keep in mind that PIOs and OCIs are barred. For an NRI opening an NPS account, all the contributions made will be regulated by the stipulation set by the FEMA and RBI.