Section 80CCD Of Income Tax Act: Deductions For NPS And APY Contributions
Under Section 80CCD of the Income Tax Act, individuals contributing to National Pension Scheme (NPS) or Atal Pension Yojana (APY) can reduce their tax liability. Employers contributing to their employees’ NPS are also eligible for tax deductions under Section 80CCD. However, an individual or an employer must fulfil certain eligibility criteria to claim a tax deduction under Section 80 CCD. This article takes you through all the important aspects of Section 80CCD. Keep reading!
Categorisation of Section 80CCD of the Income Tax Act
ThereThere are two subsections under Section 80CCD, and these were mainly introduced to help assesses get clarity regarding tax deductions available for them. Each subsection deals with certain aspects that you should clearly understand before filing ITR. Find all such information below:
1. Section 80CCD (1)
It comprises the regulations and norms related to deductions available for both self-employed and salaried individuals for their contributions toward NPS. Whether it is a government employee or a private employee who has made this contribution, the provision applies to all of them.
However, there is an age range of 18-65 years. Every Indian citizen belonging to this age group, including NRIs, will be able to avail of tax benefits under Section 80CCD (1).
An individual contributing to APY or NPS can claim tax deductions of up to Rs. 1,50,000 annually. After the introduction of a new amendment (Section 80CCD 1B) in 2015, a further additional deduction of up to Rs. 50,000 is available on the overall limit.
2. Section 80CCD (2)
This one mainly deals with the aspects related to the contributions made by the employer to the NPS of an employee. The employer can make such contributions on top of the EPF and PPF contributions. Also, it can either be higher than what the employee is contributing or equal to that amount.
Evidently, the provisions of Section 80CCD (2) apply to only salaried individuals. They can claim the deductions under this Section over the deductions of Section 80CCD (1). Also, under this particular provision, a salaried employee can claim up to 10% of his/her salary. This includes both the dearness allowance and basic pay.
Before moving forward and making the most of the benefits of Section 80CCD of the Income Tax Act, 1961, check if you are eligible for it.
Also read: Section 80D Of Income Tax Act
List of Investments Falling under Section 80CCD of Income Tax Act
Section 80CCD of the Income Tax Act features two parts, which jointly provide tax deductions to employers and employees who have contributed towards NPS. As per this section, only certain investments are eligible for deduction. They are as follows:
- Employees’ contribution of up to 10% of basic salary + DA (dearness allowance) towards the National Pension Scheme or Atal Pension Yojana are eligible for deduction
- Employers’ contribution towards National Pension Scheme or Atal Pension Yojana
- Self-contributions made to NPS or Atal Pension Yojana are eligible for tax deduction over and above the tax benefit available under 80CCD(1) limit.
Tax Deduction Limit under Section 80CCD of Income Tax Act
The two subsections of Section 80CCD provide clarity for the deduction applicable to taxpayers. Mentioned below are the details regarding the deduction limit under this Section for different investments:
- The maximum deduction limit under Section 80CCD(1) is 10% of the basic salary of the employee + DA. From FY 2017-18, this amount has been increased for self-employed individuals. The newly set deduction limit is 20% of gross total income. The maximum limit in this scenario is set at Rs. 1.5 lakh for a particular FY.
- Under Section 80CCD(2) of the Income Tax Act, employers can avail of a tax deduction of up to 10% of their basic pay + DA.
- A new amendment was included in this section as sub-section(1B) in 2015. As per this provision, both salaried and self-employed individuals can claim an additional deduction of Rs. 50,000 for their contribution towards NPS or Atal Pension Yojana.
Eligibility Criteria for Claiming 80CCD Deductions
Individuals need to meet the following parameters to be eligible for claiming 80CCD deductions:
- All Indian citizens who have made any contribution towards APY or NPS can avail of tax benefits under this provision. In fact, NRIs are also eligible to claim deductions.
- The age of the assessee should cross 18 years to be eligible to avail of tax benefits under Section 80CCD.
- Salaried individuals who got employed by the Government of India after January 1 2004 will be able to contribute up to 10% of their salary towards NPS. On the other hand, for individuals who are self-employed, this limit is 20% of their gross income (from FY 2017-18).
- Individuals belonging to Hindu Undivided Family or HUF cannot claim deductions under this provision.
What Is NPS under Section 80CCD of the Income Tax Act?
The Indian government introduced NPS as a source of pension to the citizens of the country. Initially, this scheme was meant only for government employees. However, it was later made available to employees in the private sector and self-employed individuals.
The primary motive behind the introduction of NPS was to assist individuals in creating a substantial retirement corpus.
Here are a few points that you should remember regarding NPS:
- It is mandatory to contribute towards NPS till 65 years. However, this is voluntary for private sector employees.
- One must contribute a minimum of Rs. 6,000 per annum or Rs. 500 per month, to become eligible for availing tax deduction under NPS Tier 1 Account.
- One must contribute a minimum of Rs. 2,000 per annum or Rs. 250 per month, to become eligible to avail of a tax deduction under the NPS Tier 2 Account.
- Under NPS, you get to invest in various options, such as government securities, bonds, equities, and more.
- You can partially withdraw up to 25% of the funds, subject to specific conditions.
- You can withdraw up to 60% of the sum as a lump sum payout and invest the remaining 40% in an annuity plan.
Illustration of Section 80CCD of Income Tax Act
The following example will help you understand the working of Section 80CCD of the Income Tax Act:
Mr. Verma is a Central Government employee; he contributes a sum of Rs. 80,000 towards his NPS account.
His salary structure is as follows:
Basic salary – Rs. 2,50,000
DA – Rs. 80,000
Other allowances – Rs. 1,00,000
Now, he can claim a deduction of only Rs. 46,200 under Section 80CCD(1), which is the lower of the following:
- NPS contribution of Rs. 80,000
- 14% of basic salary + DA [14% of Rs. (2,50,000 + 80,000)]
Assuming Mr. Verma invested Rs. 70,000 under Section 80C:
Deduction under Section 80CCD will be restricted to the unexhausted limit of Section 80C, i.e., Rs. 80,000 (Rs. 1,50,000 – Rs. 70,000)
If Mr. Verma’s investments under Section 80C were Rs. 1,30,000, then the deduction under Section 80CCD (1) would be limited to the unexhausted deduction limit of Section 80C, i.e., Rs. 20,000.
What is Atal Pension Yojana under Section 80CCD of the Income Tax Act?
Introduced in honour of Atal Bihari Vajpayee, APY was introduced to stay in continuance of the Pradhan Mantri Jan Dhan Yojana (PMJDY). The primary objective of this scheme was to bring employees working in the rural and organised labour sector under the domain of government pension schemes.
This scheme is supported by the Ministry of Finance and caters to the needs of the workers in the unorganised sector.
Terms and Conditions Related to Section 80CCD Deductions
Before you go ahead and claim tax deductions under Section 80CCD Of the Income Tax Act, 1961, know about the terms regarding this provision mentioned below:
- Both self-employed and salaried individuals will get to avail of tax benefits under Section 80CCD. Even though it is a must for Government employees, it is voluntary for the rest of the citizens.
- Under this tax provision, the maximum deduction limit remains Rs. 2 lakh, including an additional deduction of up to Rs. 50,000, applicable to every individual’s contribution toward NPS.
- You can claim deductions under Section 80CCD for both Atal Pension Yojana and National Pension Scheme. However, if one makes a reinvestment in an annuity plan after receiving an amount from NPS, that particular amount will be exempted from tax deductions.
- If you receive funds from NPS as monthly payments, it will be liable for taxation.
To claim deductions under Section 80CCD, you need to file ITR at the end of every FY. And, while doing so, you must present proof of the same.
Note that in terms of APY contributions, the age limit is 60 years, and individuals can also opt for premature withdrawals under certain circumstances. The pension amount differs depending on how much you are contributing to APY. Also, the amount received per month remains taxable.
Also read: Deductions Under Section 80C Of Income Tax
Final Word
Since Section 80CCD of Income Tax allows both salaried and self-employed individuals to claim tax deductions, it is necessary to mention this when filing IT returns. Also, make sure to specify whether your employer is making the contribution on behalf of you or you are making it for yourself. Submit the transaction statements mandatorily to help the IT Department expedite the entire process.
FAQs on Section 80CCD
Ans: In order to avail of tax benefits under Section 80CCD, there is a particular rule with regards to the mode of payment. To claim deductions, you either make cash payments or pay via cheques while contributing to the National Pension Scheme.
Ans: When a subscriber reaches 60 years of age, up to 40% of his/her withdrawn amount is deductible from taxation. For instance, if a person’s total corpus is Rs. 30 lakhs and he/she can withdraw 12 lakhs (40% of the total amount), it will be free from taxation.
Ans: The minimum contribution amount should be Rs. 6,000 (annually) and Rs. 500 per month to be eligible for claiming deductions under Section 80CCD. This applies to Tier 1 of the NPS, and for Tier 2 NPS, the minimum contribution limit is Rs. 2,000 annually.
Ans: Hindu Undivided Families, PIO or Persons of Indian Origin, and Overseas Citizens of India (OCIs) will not be able to avail of tax benefits under Section 80CCD (1B). However, all the non-resident Indians (NRIs) and Indian residents will be eligible for this.
Ans: The National Pension Scheme provides income to retired individuals. This is one of its primary agendas. Therefore, investors can reinvest the proceeds of the scheme in an annuity plan. The amount reinvested is entirely exempted from taxation.
Deductions under Section 80CCD of the Income Tax Act are limited to an amount of up to 10% of basic salary + Dearness Allowance. The total deduction limit is set at Rs. 1.5 lakh.
To claim a deduction under NPS Tier 1 Account, you need to contribute at least Rs. 500 a month, or Rs. 6,000 during a year. Meanwhile, to avail of a deduction under NPS Tier 2 Account, you must make an annual contribution of Rs. 2,000 or Rs. 250 per month.
You can claim a deduction under Section 80CCD of the Income Tax Act while filing your annual income tax returns. While performing this step, you will have to submit your proof of contribution towards APY or NPS.
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