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Section 80CCD of the Income Tax Act, 1961 focuses on income tax deductions that individual income tax assesses are eligible to avail on contributions made towards the New Pension Scheme (NPS) and Atal Pension Yojana (APY). NPS is a notified pension scheme offered by the Central Government. The contributions made by employers towards NPS on behalf of their employees have also come under the purview of the same section, as defined by Income Tax Act, 1961.
National Pension Scheme is a Central Government-backed savings scheme that aims to build a retirement corpus for the citizens of India.
Let’s take a closer look at the provisions of the NPS.
It is mandatory for central government employees to subscribe to NPS.
Other than employees of the Central Government, others can voluntarily contribute to NPS
Contributions to NPS have to be made consistently till the age of 60 years.
The minimum annual contribution of INR 6,000, with the minimum monthly contribution of INR 500, is necessary to be eligible for tax deductions under Tier 1 of the NPS.
The minimum annual contribution to the NPS is INR 2,000 with the monthly contribution of INR 250, is mandatory for claiming deductions under Tier 2 of the NPS.
It offers a wide range of investment instruments to select from - Government securities, fixed income bearing instruments and equity funds. However, the latter cannot exceed 50%.
It’s a cost-effective market-linked investment scheme.
It allows partial withdrawals of up to 25% on specific situations based on the reason behind the withdrawal.
It enables individuals to withdraw 60% of the proceeds in lump sum, while the remaining 40% has to be reinvested into an annuity plan.
For deferred exit, 80% of the withdrawal proceeds have to be reinvested in annuity.
Deduction for Contribution to National Pension Scheme
The scope for tax benefits offered under Section 80CCD of Income Tax Act, 1961 was improved through the Union Budget 2015 to attract more people towards making NPS investments. The amendments, introduced by the Finance Minister, Arun Jaitley, increased the deduction limit under Section 80CCD (1A) from INR 1 lakh INR 1.5 lakh (as per sub section 1A of Section 80CCD). Further, an additional deduction of up to INR 50,000 was initiated under the new sub-section 1B. This additional tax benefit is offered over and above the deduction limit under Section 80C of the Income Tax Act, 1961.
Section 80CCD has been classified into two distinct sub-sections to clearly define tax deduction eligibility for assesses. One sub-section defines rules regarding tax deductions that salaried and self-employed individuals can avail for contributions made to NPS. The other sub-section focuses on provisions for employers contributing to the NPS funds of their employees.
While claiming tax deductions, the Income Tax form has to clearly specify whether it is a self-contribution or a contribution made by an employer on behalf of its employee. Transaction statements have to be presented as a proof for claiming tax deductions under Section 80CCD.
Section 80CCD comprises of two sections:
This sub-section of Section 80CCD defines the rules related to tax deductions that income tax assesses can avail, irrespective of whether they are employed by the government or any other employers or are self-employed. This applies to all citizens of India, including NRIs, between the ages of 18 years to 60 years to NPS, who contribute to the NPS voluntarily.
The deduction is restricted to a maximum of 10% of salary for salaried employees and 10% of gross income for self-employed taxpayers, i.e. taxpayers who are not salaried employees. Here, salary refers to the total of basic pay and dearness allowance. However, this was applicable only for the FY 2016-17 because the limit has been increased to 20% from the next financial year, i.e. FY 2017-18 onwards. The deduction amount cannot be more than INR 1.5 lakh in a particular fiscal year.
Part (1B) under Section 80CCD has been introduced through amendments made to the 2015 Union Budget. It offers an additional deduction of INR 50,000 for assesses, both salaried and self-employed, who have contributed to NPS. After including 80CCD (1B), the maximum deduction limit is restricted to no more than INR 2 lakh. Tax benefits under this sub-section can be claimed over and above deductions the limit of Section 80CCD (1).
This sub-section of Section 80CCD of Income Tax Act, 1961 is applicable when an employer contributes towards an NPS fund on behalf of its employees. An employer can contribute towards an employee’s NPS, along with contributions towards PPF and EPF. The contribution of the employer can be equal or higher or lower than the employee’s contribution towards NPS. Deductions under this section can be availed only by salaried employees and not self-employed. The employed are eligible for deductions over and above the limit as per Section 80CCD (1).
In this case, employees can claim deductions under Section 80CCD (2) up to 10% of their salary, i.e. basic salary and dearness allowance taken together, or equivalent to the gross total income or equivalent to the contribution made towards NPS by the employer.
The following will give you a comprehensive idea about the terms that you should be aware of for claiming deductions under Section 80CCD.
Tax benefits are applicable on contributions made to the NPS by salaried and self-employed assesses as well as their employers.
The applicable tax deduction that can be claimed is 10% of salary (basic and dearness allowance) for salaried assesses or 10% of gross income for the self-employed can be claimed with the maximum deduction of up to INR 1.5 lakhs.
An additional deduction of up to INR 50,000 is applicable on contributions toward NPS by individuals under sub-section 1B from the FY 2016-17, increasing the maximum limit for deductions to INR 2 lakhs annually.
Tax benefits received under Section 80CCD cannot be again claimed under Section 80C, and the total tax deduction under Section 80C and Section 80CCD combined together cannot exceed INR 2 lakhs.
The proceeds from NPS received in the form of monthly pension payments or surrendered accounts will be taxable under the relevant tax slabs as specified under Section 80C of Income Tax Act, 1961.
Reinvestment made in an annuity plan with the proceeds of NPS is exempted from tax deductions.
Deductions under 80CCD (1) are limited to INR 1.5 lakh per year and an additional deduction of INR 50,000 can be claimed under Section 80CCD (1B), taking the maximum deduction limit to INR 2 lakhs.
Here is the eligibility criteria for claiming deductions under Section 80CCD of Income Tax Act, 1961:
Eligible only for individual assesses, both salaried and self-employed.
Citizens of India, including NRIs, can avail tax benefits under Section 80CCD
HUF (Hindu Undivided Family) are not eligible for tax benefits under this section
Deduction under 80CCD (1) is restricted to up to INR 1.5 lakh. An additional deduction of up to INR 50,000, as introduced by Union Budget 2015, can be claimed under 80CCD (1B), thereby taking the maximum deduction limit to INR 2 lakh.
An income tax assesses employed on or after 1st January, 2004 by the Central Government can contribute up to 10% of the annual salary (basic and dearness allowance) towards NPS.
Salaried employees who are not employed by the Central Government could contribute a maximum of 10% of annual salary (basic and dearness allowance), while self-employed tax assesses could claim deductions of up to 10% of gross income during the FY2016 - 17. The deduction limit has been increased to 20% from the FY 2017 – 18.
Tax deductions for contributions made to the National pension Scheme can be availed under Section 80CCD at the end of the financial year. The contributions made by salaried and self-employed assesses can be claimed while filing for Income Tax returns.
What is the minimum contribution I can make to the NPS and still claim deductions?
You have to make a minimum annual contribution of INR 6,000, with the minimum monthly contribution being INR 500, to be eligible for tax deductions under Tier 1 of the National Pension Scheme. While for claiming deductions under Tier 2 of NPS, the minimum annual contribution to NPS is INR 2,000 with the monthly contribution being INR 250.
Who can invest in NPS?
Any individual taxpayer between the ages of 18 years and 60 years can voluntarily contribute towards the National Pension Scheme. The individual can be a citizen of India, including Non- Resident Indians, but not extending to HUF (Hindu Undivided Family).
Which mode of premium payments can be claimed as deductions?
The accepted modes of premium payment as contributions toward National Pension Scheme are cash and cheques.