Tax Benefits under Section 80CCD(1B) of Income Tax Act
Many salaried and non-salaried people invest in the National Pension Scheme or NPS to secure their life post retirement. To encourage more people to invest in NPS, an additional deduction worth Rs. 50,000 was announced, as per Section 80CCD(1B) or Section 80CCD (2) of Income Tax Act.
Just so you know, Section 80CCD 1(b) and Section 80CCD(2) are the same. Read on to know more about eligibility and deductions under Section 80CCD (1B).
About Section 80CCD(1B) of IT Act
Section 80CCD of ITA mainly facilitates deductions to individuals who contribute to the National Pension Scheme. Until 2015, as per the norms of the Income Tax Act, individuals could only avail of tax benefits of up to Rs. 1 lakh for the same. However, the Government made a few changes to this provision and announced that the maximum deduction would be Rs. 1.5 lakh from 2015 onwards.
The launch of Section 80CCD(1B) or 80CCD 2 of the Income Tax Act enabled individuals to claim an additional deduction of Rs. 50,000 for contributions they are making towards their NPS accounts.
This inevitably increased the maximum limit of deduction to Rs. 2 lakh u/s 80CCD of ITA.
If you are planning on investing in the National Pension Scheme, refer to the following section to know about certain intricacies of this provision.
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Eligibility Criteria for Section 80CCD (1B)
Eligibility criteria for tax deductions under Section 80CCD (2) is given below:
- The individual should be of 18 years of age or above to claim deductions under Section 80CCD.
- Citizens of India residing both within and outside Indian territory are eligible for deductions u/s 80CCD.
- All individuals, whether they are employed at government or private companies or self-salaried, are eligible to claim deductions under this Section.
- HUFs (Hindu Undivided Family) are not eligible to enjoy the benefits under Section 80CCD.
Section 80CCD Deductions and Limits
The following points detail the deductions and limits mentioned under Section 80CCD of the Income Tax Act:
- An additional deduction of Rs. 50,000 is added if an individual contributes to the National Pension Fund under subsection 1B u/s 80CCD for a total deduction of Rs. 2 lakh per year.
- Salaried employees can claim a deduction of upto 10% of their salary. Here, the salary amount includes Basic Pay and Dearness Allowance.
- Central Government employees can claim their entire contribution to NPS as tax deductions.
- Self-employed individuals can claim up to 20% of their gross income as deductions.
- Total deduction limit of Sections 80C + 80CCC + 80CCD(1) +80CCD(1B) is Rs. 2 lakh.
What Is the NPS Scheme?
The Government of India initiated the National Pension Scheme (NPS) to inculcate the habit of systematic saving for the future. Under this scheme, any working individual can deposit a certain amount from his or her salary during employment to this scheme. This periodically saved amount will help build an investment corpus for retirement.
The NPS account holder can withdraw a certain amount after retirement. They will receive the remaining amount as a pension.
Earlier, only Central Government employees had access to the National Pension Scheme. However, PFRDA (Pension Fund Regulatory and Development Authority) has made NPS accessible to the public. One can enroll in NPS voluntarily for a secured future.
Eligibility to Invest in NPS Scheme
One has to fulfill the following conditions to be eligible to invest in National Public Scheme:
Eligibility criteria for citizens
- Every citizen of India, whether residing within the territory or outside, can invest in NPS.
- Applicants must be between 18-30 years of age at the time of application.
- It is necessary for individuals to comply with the KYC regulations as mentioned in the Subscribers Registration Form.
Eligibility criteria for corporates
Entities registered under the following regulations can also apply for NPS:
- Companies Act
- Co-operatives Act
- Registered partnership firms
- Central Public Sector Enterprise
- State Public Sector Enterprise
- Trust/Society
- Proprietorship concern
- Act of Parliament and State legislature or by State/central order
Types of NPS Accounts
Accounts under National Pension Scheme are of two types:
- Tier 1 NPS Account
This is a mandatory account you need to open to enrol for NPS. Tier 1 account serves solely to save for retirement. Hence, withdrawing from this account comes with various restrictions. You cannot withdraw from a Tier 1 account before the age of 60.
The minimum investment required to open a Tier 1 NPS account is Rs. 500. You can deposit Rs. 1000 per year to keep this account active.
- Tier 2 NPS Account
Unlike Tier 1 accounts, Tier 2 NPS accounts are voluntary or optional. You can either open a Tier 2 account at the same time as opening a Tier 1 account or later. There are no strict rules for withdrawal from these accounts. Pensioners can contribute or withdraw amounts to and from a Tier 2 NPS account as per their convenience.
The minimum amount to open a Tier 2 account is Rs. 1000. In contrast to Tier 1 accounts, there is no compulsion to deposit a certain amount to keep a Tier 2 account active.
Things to Remember while Availing Benefits under Section 80CCD(1B)
Make sure to keep these following pointers in mind in case you are claiming deductions under Section 80CCD(1B):
- You will only be eligible for the additional deduction of Rs. 50,000 for making a contribution towards a Tier 1 account of NPS. So, it is apparent that contributions being made towards Tier 2 NPS accounts will be ineligible for such benefits.
- It is necessary to submit certain documents related to the transaction (NPS contribution) to be able to claim deductions under Section 80CCD(1B) of the Income Tax Act.
- If the assessee passes away and the nominee decides to close the account of the National Pension Scheme, the amount he/she has received will be free from taxation.
- In case any salaried individual decides to opt out of his/her NPS account or close it permanently, 40% of the entire amount will be exempt from taxation.
- After reaching 60 years of age, you can decide to withdraw 60% of the overall amount as tax-free income. Note that the remaining 40% of that total amount can also remain tax-free if you buy an annuity plan using it.
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Additionally, remember that for individuals making partial withdrawals from their NPS accounts, 25% of their contribution will remain tax-free.
Documents Required for Claiming Tax Benefits
To claim tax benefits, you must carry the following documents:
- Proof of Investment and transaction statement
- Receipt for contributions done in Tier 1 account of NPS. This receipt is available online in your NPS account.
Important Points to Consider for Section 80CCD(1B)
Below are some points to keep in mind to claim deductions under Section 80CCD(1B):
- An NRI can open an NPS account through eNPS. To do so they require their Aadhaar Card, PAN card and bank account details.
- For voluntary investment in NPS, Section 80CCD(1B) grants an additional deduction of Rs. 50,000.
- Both salaried and self-salaried individuals of 18 years and above can claim for deductions under Section 80CCD (1B).
Final Word
Because of the deductions available under Section 80CCD(1B) of the Income Tax Act, the tax liability reduces significantly. This way, you can save a significant amount on taxes as well as create a considerable corpus for your retirement.
Frequently Asked Questions
Ans: Yes, you can avail of tax benefits under both these subsections of 80CCD of ITA. However, to claim Section 80CCD(2) benefits, you need to be an employer making a contribution towards the employee’s NPS.
Ans: Section 80CCD(1B) of ITA primarily deals with tax deductions on your investment towards NPS. Therefore, note that there is no provision to avail tax benefits under this subsection of Section 80CCD of the Income Tax Act.
Ans: Persons of Indian Origin (PIO), Overseas Citizens of India (OCIs), and HUFs or Hindu Undivided Families cannot claim benefits under Section 80CCD(1B). It is possible for only resident and non-resident Indians to avail this benefit.
Ans: To acquire benefits of Section 80CCD(1), an individual must belong to one of these three categories:
1. Private employees
2. Government employees
3. Self-employed individuals
Any of these individuals making a contribution towards the National Pension Scheme is eligible for deductions.
Ans: The Income Tax Act does not allow individuals to receive benefits under Section 80CCD(1B) if they opt for the new regime. However, people who are still assessing their taxes under the old regime can benefit from this provision.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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