The Income Tax Act of 1961, is an act to levy, monitor and collect income tax in India. There are various sections in the IT act that allow for tax deduction when a person has contributed to the national pension scheme (NPS) and Atal Pension Yojna (APY). Sec 80C, Sec 80CCC and Sec 80CCD allow for tax deduction of upto Rs.1,50,000. Around 4 years back, a new sub section called 80CCD(1B) was also introduced that allowed for an additional deduction of upto Rs.50,000. Let’s talk about 80CCD and its sub sections in detail:
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What is section 80CCD?
This section of the Income Tax act allows for tax deduction on investments that have been made towards the National Pension Scheme (NPS) or the Atal Pension Yojna (APY). This section covers all the contributions made by the employee or even the employer towards the NPS.
How does NPS work?
National pension scheme is a popular scheme made by the government for helping Indian citizens save for their retirement. Building a retirement corpus for the future is just as important as paying the bills of today. Started in 2004, it is an organized scheme that was open only for government employees until 2009 when it opened for all sections – public and private. You can invest in instruments like equity funds, government bonds, government securities, etc. Do note that NPS is one of the cheapest equity-linked investment options in the market. NPS has 2 types of accounts: NPS Tier 1 and NPS Tier 2.
NPS Tier 1 account
This is the primary account available under the NPS:
- It’s mandatory to keep money locked in till 60 years of age.
- The individual can do a partial withdrawal but that is allowed only under certain conditions.
- The minimum amount one must contribute to be eligible for income tax deduction under the NPS Tier 1 account is Rs. 6,000 per annum or Rs. 500 per month.
- The contributions made under NPS Tier 1 account are eligible for tax deduction of up to Rs.1,50,000 under Sec 80CCD(1) and up to Rs.50,000 under Sec 80CCD(1B) which makes a total of Rs.2,00,000.
NPS Tier 2 account
NPS Tier 2 account is a secondary account that can be opened in addition to the Tier 1 account. For opening this account, it is mandatory that you have a primary account. This one is basically a non-retirement NPS account. It’s features are:
- This account allows for money transactions as per convenient.
- Only government employees are eligible for tax deduction of upto Rs.1.5 lakhs under this account but if they avail the tax benefit then they have to lock-in their money for at least 3 years.
- Private employees have no lock-in period for their money whatsoever.
- No minimum balance requirement or minimum annual contribution necessary.
Moving back to the topic at hand, this section is subdivided into three: Sec 80CCD(1), Sec 80CCD(2) and sec 80CCD(1B).
This section defines the rules related to income tax deduction for investments made by a government employee, private employee or a self-employed individual. The provisions of this section apply to all Indian citizens who are contributing to the NPS and are between the age of 18 to 60 years. This section also applies to NRIs. The key points of Section 80 CCD (1) are:
- Maximum deduction allowed under this section is 10% of the salary (basic + Dearness Allowance) or 10% of the gross income of the individual.
- From FY 2017-18, this limit has been increased for the self-employed individuals to 20% of the Gross total income with the maximum limit being capped at Rs. 1,50,000/- for a given financial year.
The provisions under Section 80 CCD (2) play a role when an employer is contributing to the NPS of an employee. This particular section covers only salaried individuals and not self-employed individuals. The deductions under Section 80CCD(2) can be availed over and above those of Section 80 CCD (1):
- The contributions towards NPS can be made by an employer in addition to those made towards PPF and EPF.
- The contribution can be equal to or higher than the contribution of the employee.
- The lowest amount of the below three will be eligible for deduction:
a) Actual contribution of the employer.
b) 10% of their salary which includes the basic pay and dearness allowance.
c) Gross total income.
Section 80 CCD has been amended in the Union budget of 2015 with the introduction of a new sub-section 1B. Under these new provisions, individuals can claim an additional deduction of Rs.50,000. It is to be noted that both salaried as well as self-employed individuals can avail the benefits of this section. The maximum deduction available under Section 80CCD has been raised to Rs.2,00,000 after the addition of this amendment. Tax benefits under Section 80CCD (1B) can be claimed over and above the deductions available under Section 80CCD (1).
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