The government aims to reduce your tax liability by offering several exemptions and deductions through different sections under the Income Tax Act, 1961.
If you plan your taxes well, these deductions and exemptions can help reduce your liability by a significant amount, especially if you are salaried.
The most popular and commonly known section is 80C. It offers various deductions to help you avail of tax benefits. Moreover, section 80C has several sub-sections. In this post, we will discuss one of these, section 80CCD of the Income Tax Act, 1961.
What is section 80CCD?
This section provides tax deductions if you contribute to the Atal Pension Yojana (APY) or the National Pension System (NPS). Any contributions made by your employer to the NPS also qualify for deductions under this section.
Why is section 80CCD important?
The section 80CCD limit and provisions not only help you reduce your tax liability but also contribute towards your retirement corpus. The section is divided into two categories.
Sub-section (1) relates to your contributions made towards eligible investments and sub-section (2) deals with your employer's contribution.
When you regularly contribute to the eligible pension funds, you can accumulate a sizeable corpus over the long term. The money can be invested across various asset classes as per your requirements and risk appetite.
On maturity, you can reinvest the corpus into an annuity plan to receive regular income post-retirement.
Classification of section 80CCD
For further clarification related to the deductions, this section is classified into two subsections. One of them lays down the rules associated with the available deductions for salaried and self-employed professionals.
The other provides the regulations for contributions made by employers towards employees’ NPS accounts.
Section 80CCD (1)
Section 80CCD (1) states the rules regarding your contribution towards eligible pension schemes like NPS. The deduction is available to everyone irrespective of whether you are a government or private employee or a self-employed professional.
The provisions are applicable to all Indian citizens aged between 18 and 65 years contributing to NPS. Moreover, the rules also apply to Non-Resident Indians (NRIs).
The provisions under this subsection are as follows:
- Maximum deduction: 10% of basic salary plus dearness allowance (DA) or 10% of gross annual income
- For self-employed professionals, the deduction is lower from INR 1.50 lakhs or 20% of their gross annual income
- An amendment introduced in Budget 2015, provides an additional deduction of INR 50,000 under section 80CCD (1B) for salaried and self-employed individuals
Section 80CCD (2)
Sec 80CCD (2) provisions are related to investments made by employers in employees’ NPS accounts. Employers may contribute to their employees’ NPS accounts in addition to the contributions made to Public Provident Fund (PPF) and Employee Provident Fund (EPF).
The company’s contribution can be equal to or more than that of its employees.
However, this subsection does not apply to self-employed professionals. As per the provisions, you may avail of tax deductions of up to 10% of your salary (including basic salary and DA) or the actual employer contribution to your NPS account.
Terms and conditions for claiming section 80CCD tax deductions
The terms and conditions to claim 80CCD deductions are as follows:
- If you are salaried, the deductions are available for contributions made by you and your employer towards your NPS account. These are also available for contributions made by self-employed professionals to this scheme.
- Central Government employees’ deduction is capped at 14% of their salaries
- The deduction is 10% of your salary (basic plus DA) or 10% of gross income (if you are self-employed); the maximum limit is INR 1.50 lakhs per year.
- No maximum limit on the deduction for employers’ contributions.
- Additional deduction of INR 50,000 contributed to NPS is eligible for deduction under its sub-section (1B).
- Deductions claimed under this section cannot be claimed under section 80C of the Income Tax Act, 1961; maximum deduction under both sections is capped at INR 1.50 lakhs per annum.
- Any benefits received from your NPS investment like monthly payouts or surrendered accounts are liable to tax as per your income tax slab rates.
- If you reinvest the NPS benefits in an annuity plan, you are not liable to pay any tax on that.
You can claim the deductions at the end of the financial year while filing your income tax returns (ITR).
Furthermore, you need to provide proof of your contributions to be eligible for these deductions.
Eligibility for claiming section 80CCD deductions
- Salaried and self-employed individuals
- Indian citizens as well as NRIs
- Hindu Undivided Family (HUF) is not eligible for deductions
- Deduction under sub-section (1) is capped at INR 1 lakh; any balance contributions can be claimed under the sub-section (2)
- Cash or check payments are accepted as a contribution
What is the National Pension System (NPS)?
NPS was introduced by the Central Government to provide the benefits of an organized pension scheme to Indians.
Initially, the scheme was only for government employees but later, it was made available to all eligible citizens including private-sector employees and self-employed professionals.
The primary objective of NPS is to enable you to build a sizeable corpus for your post-retirement years.
The investment can help you to get a fixed monthly income to sustain your lifestyle during post-retirement.
Some highlights of National Pension System are listed below:
- Mandatory for government employees; private sector employees and self-employed professionals can make voluntary contributions.
- You must continue your contribution until you reach the age of 65 years.
- Tier 1 account is mandatory to benefit from the deductions available in the NPS section under the Income Tax Act, 1961.
- The minimum contribution to a Tier 1 account is INR 500 per month or INR 6,000 per annum.
- The minimum contribution to a Tier 2 account is INR 250 per month or INR 2,000 per year.
- You can invest across different asset classes, such as equity funds, debt instruments like company bonds, government bonds, and securities, and others; however, the maximum investment allocated for equities is limited to 75% of your contribution.
- Subject to certain conditions, you may partially withdraw up to 25% of the accumulated corpus.
- On maturity, you can withdraw up to 60% of the corpus and reinvest the balance in an annuity plan.
Putting money in NPS can be either done automatically or actively as discussed below:
The allocation of the amount between equity and debt is automatic based on your age as per the government rules.
Auto investing can be conservative, moderate, or aggressive, which primarily determines the amount invested in equity and related instruments.
If you opt for active participation, you are responsible for all the investment decisions. Based on your requirements and risk appetite, you may invest up to 75% of the amount in equity and equity-related products.
However, this limit reduces by 2.50% every year once you reach the age of 50 years.
Deduction for contribution to NPS
- The NPS 80CCD income tax deductions are divided into two sub-sections - (1) and (2) and the limits under these two are not overlapping.
- Combined tax savings under this section and section 80C of the Income Tax Act, 1961 are common and capped at a maximum of INR 2 lakhs per year.
- The reinvested maturity benefits received from NPS are tax-exempt; however, monthly income or lump-sum payout on maturity are added to your income and taxed at the applicable income tax slab rate.
Section 80CCD and its subsections relate to the tax benefits provided on contributions made to the Central Government-notified pension fund schemes.
In addition to the sections mentioned above, there are other subsections under the Income Tax Act, 1961 that lay down the rules on the treatment of money, tax implications of premature withdrawals, and other terms and conditions related to your contributions into the pension fund schemes.
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