What if you could build a corpus for your retirement while saving tax bills? Isn’t this tempting? That’s where certain subsections of Section 80C, including 80CCD(1), 80CCD(1B) and 80CCD(2), come into play. Specifically National Pension Scheme (NPS), Section 80CCD deductions enable you to enjoy tax benefits while helping you diversify your investment portfolio.
Section 80CCD of the Income Tax Act relates to all deductions made for contributions to the National Pension Scheme or Atal Pension Yojana (APY).
Section 80CCD has two parts: 80CCD(1) and 80CCD(2). Section 80CCD(1) deals with the contributions made by the employee in the NPS scheme, whereas 80CCD(2) deals with the contributions made by the employer.
Section 80CCD(1) is further divided into sub-section 80CCD(1B) which was added in the new amendment made in 2015. With this subsection, you can claim additional ₹50,000 over the basic ₹1.5 lakh if you have a Tier 1 account, increasing the total deduction to ₹2 lakh.
The eligibility for these contributions includes the following:
The difference between these subsections lies in the deduction limits based on the type of individuals. Check some of these differences in the table below:
| Section 80CCD(1) | Section 80CCD(1B) | Section 80CCD(2) |
|---|---|---|
| Applicable for all employees contributing to NPS | Additional ₹50,000 deductions for employees contributing to NPS | Applicable for contributions made by employers in NPS, other than EPF/PPF |
| The age limit must be 18 to 70 years | The age limit must be 18 to 70 years | The age limit must be 18 to 70 years |
| For employees, the deduction is 10% of their basic salary + DA in the previous year | The maximum deduction limit of 80CCD(1) and 80CCD(1B) is ₹2 lakh (₹1.5 lakh + ₹50,000) | Only available for salaried individuals |
| For self-employed, the deduction is 20% of the gross total income of the previous year | For Central/State Government employers, deductions are up to 14% of salary (basic + DA) | |
| The maximum exemption limit is ₹1.5 lakh | For other employers: A maximum deduction of 10% (basic+DA) under the old tax regime, A maximum deduction of 14% (basic+DA) under the new tax regime. |
The tax benefit is available for tier-1 accounts starting at ₹500 and ₹250 for tier-2 accounts. You can choose from investment options like government securities, equity funds, and government bonds.
The deduction limit for salaried employees under NPS tax benefits is a maximum of 10% of the basic salary + DA in the last year. On the other hand, the deduction allowed for self-employed people is 20% of the gross total income in the last year.
Under Section 80CCD(1), the maximum NPS tax deduction limit is ₹1.5 lakh. This limit increases to ₹2 lakh with an additional deduction of ₹50,000 under 80CCD(1B).
Some tax benefits for NPS investments by employees and employers include:
Section 80CCD(1B) is a sub-section of 80CCD(1) and allows an additional NPS tax deduction limit of ₹50,000 along with the general cap of ₹1.5 lakh. Here is how to claim these in relevance to NPS contributions.
You can claim this deduction if you are an existing NPS contributor and are opting for the old tax regime. However, remember not to duplicate the claim by filing for the same contribution under both sections.
Under section 80CCD(2), tax deduction benefits are provided to employers in relation to the National Pension Scheme. Here is an overview of the total permissible deductions and contributions made by the employer.
An employer can contribute to the NPS scheme other than PPF and EPF contributions toward the employee. This contribution can be equal to or more than the employee contribution.
This tax benefit is only applicable to salaried employees and not self-employed individuals. You can claim these deductions as a central or state government employer or any other private employer.
As per the conditions of section 80CCD(2), if you are a central government or state government employer, the deduction permissible is up to 14% of basic salary and DA. In case you are a non-government or private employer, a maximum deduction of 10% of basic salary + DA was allowed under the old tax regime.
However, the new tax regime applicable from the financial year 2024-25 increased the maximum deduction of up to 14% of basic salary plus DA.
By following certain tips and avoiding common errors, you can maximise your tax savings through the NPS scheme.
1. What is Section 80CCD and how does it provide tax benefits?
Section 80CCD related to the deductions available for salaried and self-employed individuals as taxpayers under the National Pension Scheme (NPS) and Atal Pension Yojana (APY).
2. What is the additional deduction under Section 80CCD(1B)?
The additional deductions you can make is ₹50,000 in addition to the tax exemption of up to ₹1.5 lakh under Section 80CCD(1B).
3. How much tax deduction can I claim for NPS contributions?
You can claim a tax deduction of up to 10% of your salary (basic + DA) with a total tax cap of ₹1.5 lakh. As per the new tax regime, this tax deduction has increased to 14%.
4. Can employer contributions to NPS be claimed under Section 80CCD?
Yes. Employer contributions to NPS can be claimed under Section 80CCD(2). This contribution towards employees of up to 10% is applicable with a taxable income of up to ₹7.5 lakh.
5. What is the difference between Section 80CCD(1) and 80CCD(2)?
Section 80CCD(1) deals with contributions made by the employee to the NPS scheme, whereas Section 80CCD(2) deals with contributions made by employers under the NPS scheme.
6. Are self-employed individuals eligible for deductions under Section 80CCD?
Yes. Self-employed individuals are eligible for tax deductions under Section 80CCD.
7. What documents are required to claim deductions under Section 80CCD?
To claim tax benefits under Section 80CCD, you must provide an Aadhaar card, PAN card, bank statement and relevant documents representing you as a salaried/self-employed individual with taxable income proof.
