The Income Tax Act provides a number of deductions and tax benefits to taxpayers, so they can strategically mitigate their tax liability. Section 80CCD of the Income Tax Act details the deductions available to taxpayers for their contributions to these schemes. Let us explore in detail the various NPS tax benefits available under this section.
Section 80CCD of the Income Tax Act provides the deductions offered to taxpayers against their contributions to Government pension schemes, namely the National Pension Scheme and the Atal Pension Yojana. The total deduction available under this section is Rs.2 lakh, but this amount is bifurcated into two parts. A deduction of Rs.1.5 lakh is available under section 80CCD and section 80C combined. However, you can claim an extra deduction of Rs.50,000 under section 80CCD (1B).
Let us delve into the details of the deductions available under this section.
The deductions available under section 80CCD are divided into two sub-parts – section 80CCD (1), which further has subsection 80CCD (1B), and section 80CCD (2). Let us understand each of these sections.
Under this subsection, all taxpayers, whether they are Government or private employees or self-employed individuals, are eligible to claim a deduction for their contribution to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). This deduction is also extended to the Non-Resident Indians.
The taxpayers must be within the age bracket of 18 to 60 years to get the tax benefit under section 80CCD (1).
The following limits apply to the deduction available:
This subsection provides taxpayers with a deduction against the amount contributed by their employers to their NPS account. The benefit under this section is available only to Government and private employees, and not to those who are self-employed. This deduction is over and above the Rs.1.5 lakh deduction limit of sections 80C, 80CCC, and 80CCD(1) combined.
The amount of deduction can be calculated as follows:
This subsection was introduced as an amendment during the 2015 Union Budget. As per the rules mentioned under section 80CCD (1B), taxpayers can claim an additional deduction of Rs.50,000, over and above the Rs.1.5 lakh limit available under Section 80C of the I-T Act, for their contribution to the National Pension Scheme. This change increased the overall deduction limit of section 80CCD to Rs.2 lakh.
National Pension Scheme is a retirement saving scheme introduced by the Indian Government. It is a voluntary scheme that is designed to help individuals save for their future and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
The NPS has a lock-in period or maturity period till the individual turns 60 years of age. Moreover, the scheme is compulsory for employees of the Central Government, while it is optional for other individuals.
Under this scheme, the individual contributions are pooled in a fund. This is then invested by professional fund managers, authorized by PFRDA, as per the investment guidelines that have been approved. This helps in creating a diversified portfolio consisting of shares, debentures, bonds, T-bills, etc.
One of the major perks of this product is the tax benefits that it enjoys. It is one of the few investments that come under the category of an EEE investment, meaning that the amount contributed towards the NPS account, maturity amount, and any interest earned will be exempt from tax. However, you must use a minimum of 40% of the maturity amount to purchase annuities that will give you a regular monthly income. The rest 60% is withdrawable tax-free.
You can avail the NPS tax benefit for your contribution to NPS under section 80CCD (1) of the Income Tax Act.
Launched in 2015, the Atal Pension Yojana was introduced with the motive to create a system for social security for Indians, especially those in the underprivileged sections of society. All taxpayers within the age bracket of 18 to 40 years can contribute an amount to the APY.
Once the contributor to the APY reaches the age of 60, they will receive a minimum guaranteed monthly income.
Under section 80CCD, the taxpayers contributing to the Atal Pension Yojana can claim a deduction for the amount they have contributed, subject to the maximum limit given under this section.
However, as per the latest guidelines of the Finance Ministry, since 1st October 2022, individuals who are or have been taxpayers are no longer eligible to opt for the Atal Pension Yojana.
The following benefits are available under section 80CCD:
|Section 80CCD (1)||For employees: Up to 10% of basic salary + DAFor self-employed: Up to 20% of gross income |
Total amount is capped at Rs.1.5 lakh
|Section 80CCD (1B)||Up to Rs.50,000|
|Section 80CCD (2)||Private employees: Up to 10% of basic salary + DAGovernment employees: Up to 14% of basic salary + DA|
The following is the eligibility criteria to claim a deduction under section 80CCD:
You must keep the following terms in mind while claiming a deduction under section 80 CCD:
Section 80CCD lists the guidelines for the tax deductions available to those who contribute to pension schemes, mainly the National Pension Scheme and the Atal Pension Yojana. The maximum deduction that can be claimed under this section is Rs.2 lakh. All employees, as well as self-employed individuals, can claim the deduction.
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The amount of deduction that can be claimed under section 80CCD is limited to Rs.2 lakh.
All Indian citizens, both residents and non-residents, can invest in the National Pension Scheme.
Section 80CCD(1B) allows an additional deduction of Rs.50,000, over and above the Rs. 1.5 lakh limit under sections 80CCD, 80C, and 80CCC.
Yes. All employees can claim a deduction for their employer’s contribution towards their NPS accounts. This deduction is over and above the Rs.1.5 lakh limit.
There is no maximum amount for NPS contribution. However, you can only claim a tax deduction on it up to Rs. 2 lakh.
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