Navigating Section 80CCD: Your path to saving taxes with NPS

Each citizen must pay his income tax in a timely manner to build a healthy national economy. 

To encourage this, the government has initiated several tax exemptions in the Income Tax Act of 1961, which provide some relief on investment. Among all these provisions, the deduction under 80CCD is one of the most significant tax-saving deductions.

Here is the introduction to the tax exemptions under Section 80CCD National Pension Scheme and the differences between 80CCD (1), 80CCD (1B), and 80CCD (2).

What is Section 80CCD National Pension Scheme?

Tax deduction under section 80CCD is offered on investments made in pension plans launched by the Central Government, such as NPS and Atal Pension Yojana.

One of the major benefits of this section is a deduction under 80CCD, which gives extra room for tax savings.

Recent Changes in Budget 2024

Finance Bill 2024 increased the limit on employers’ contributions under Section 80CCD(2) to pension schemes.

Previously, it was at par with the salary plus dearness allowance of non-governmental employers, not exceeding 10% of such salary and allowance. It has now been increased to 14%. All these benefits are available only to individuals who have opted for the new tax regime under Section 115BAC.

What is the NPS/Atal Pension Yojana?

The National Pension Scheme or Atal Pension Yojana is a retirement plan savings scheme. Private and government employees or self-employed individuals can initiate it. These sound investment schemes create a retirement investment fund.

Types of NPS Accounts

NPS offers two kinds of accounts:

1. Tier I Account: Pension Account

This account cannot be withdrawn till they are 60 years of age. There is partial withdrawal allowed with some restrictions. The contribution made into this account is also eligible for tax relief under Section 80CCD(1) and Section 80CCD (1B).

One can invest up to ₹2 lakhs in this account and also claim tax relief of ₹1.5 lakhs under Section 80CCD(1) besides another ₹50,000 under Section 80CCD(1B).

2. Tier 2 Account: Savings Account

This is a voluntary account in which the subscriber can withdraw the funds he invests. Only central government employees get a deduction on deposits made to the Tier 2 account under Section 80C on contributions made to it.

Deposits by private-sector employees are not allowed as a deduction in a Tier 2 account. However, if any gains are made from them, they are deductible according to the income slab rates.

Important Conditions for Deduction under Section 80CCD

Following are some of the important conditions applicable to deduction under 80CCD of the Income Tax Act, 1961:

1. Salaried as well as self-employed people are granted the right of deductions under this section. Government employees compulsorily have to do this, but all others have a choice.
2. Under Section 80CCD(2), deductions are up to ₹2 lakhs only if the extra ₹50,000 of the deduction allowed under Section 80CCD (1B) is incorporated.
3. Section 80CCD National Pension Scheme cannot be clubbed with Section 80C. 
4. Amounts invested in an annuity plan by NPS funds are tax-exempt. When filing returns on the last day of the financial year, there would be deductions available under Section 80CCD.

Here is a table on deduction under 80CCD:

Section	Nature of Contribution	Maximum Deduction Limit	Key Notes
80C	Investment in schemes such as LIC premiums, NPS deposits, PPF, FDs, etc.	₹1,50,000	According to Section 80CCE, the combined deduction for 80C, 80CCC, and 80CCD(1) is capped at ₹1.5 lakh per financial year.
80CCC	Contributions made towards certain pension funds	As per plan limits	Applicable to investments in specified pension funds. The total deduction under this section is clubbed with Section 80C and 80CCD(1) limits.
80CCD(1)	Contributions made by individuals to the NPS Scheme (up to 10% of salary)	₹1,50,000 (shared with 80C & 80CCC)	This applies to employee contributions towards the National Pension Scheme. The deduction limit is part of the overall ₹1.5 lakh cap under 80C.
80CCD(1B)	Additional self-contribution to NPS	₹50,000	This is an extra deduction beyond the ₹1.5 lakh limit of 80C, offering an additional tax-saving opportunity solely for contributions to NPS.
80CCD(2)	Employer’s contribution to the NPS:	Central Govt: 14% of salary Others: 10% of salary	The employer’s contribution to NPS is deductible over and above the limits of 80C and 80CCD(1B).

Differences Between 80CCD (1), 80CCD (1B), and 80CCD (2)

80CCD National Pension Scheme is divided into three parts:

1. Section 80CCD (1): Contributions by Individuals

Section 80CCD (1) is for each Indian citizen contributing to NPS who is a government employee, private-sector employee, or self-employed. This section extends to Non-Resident Indians aged between 18 and 70 years who are contributory members of NPS. 

• Limitation on Deduction: The deductions for salaried people are restricted to 10% of basic salary plus dearness allowance. The deductions can be up to 20% of his gross total income for a self-employed person.
• Section 80CCD (1) allows a deduction of ₹1.5 lakh per year. It is distributed among other sections, which include 80C and 80CCC.

For example, if the salary earned by the employee is ₹7 lakh per annum, then the individual can claim a deduction of ₹50,000 or 10% of his salary

2. Section 80CCD (1B): Extra Deduction 

Section 80CCD(1B) even allows an additional tax deduction beyond the limit of Section 80CCD(1).

Any person who has contributed to the NPS account can contribute only if they are an old tax regime filer.

Here are some key things to remember:

1. This only works under the older tax regime and not the new regime under Section 115BAC(1A).
2. The deduction is valid only for NPS Tier 1 accounts and not Tier 2 accounts.
3. This deduction above ₹50,000 is for the salaried and the self-employed.
4. Documentary evidence in respect of contribution shall be furnished along with returns of income.
5. NPS offers partial withdrawal of NPS savings under certain conditions.
6. The ₹50,000 deduction under Section 80CCD (1B) is not linked with the ₹1.5 lakh combined limit of Sections 80C, 80CCC, and 80CCD (1). 

Example:

If the person has already claimed the full ₹1.5 lakh under 80CCD (1), he can make another deduction of ₹50,000 under 80CCD (1B).

3. Section 80CCD (2): Employer’s contribution to NPS

80CCD(2) of the Income Tax Act is an employer’s contribution made towards the employee’s National Pension Scheme account. It is beneficial for salaried people as it offers a deduction-based employer contribution.

• This section is for salaried employees only, as the employer contributes on behalf of an employee.
• Limit of Deduction: This exemption is available only up to 10% of the employee’s salary, which goes into both basic salary and dearness allowance (DA). However, unlike Section 80CCD (1), the exemption amount is not capped by any limit in rupees. This makes it particularly beneficial for individuals with high tax salaries.
• Contributions under Section 80CCD (2) are not related to the limits available under Section 80C and Section 80CCD (1). Salary earners can add more benefits to their taxes without impacting other deductions.

Example: If an employer draws ₹60,000, which is 10% of salary, from an employee’s NPS account, then the entire contribution amount would be allowed as a deduction under this section without any limitation.

Deduction for Employer’s Contribution:

The employer can contribute as much as 14% of the salary of the employee (basic + DA), which is covered under 80CCD(2).

Strategies to Increase Tax Savings under Section 80CCD National Pension Scheme

Here is how to save more taxes under Section 80CCD National Pension Scheme:

1. Maximising employee contributions under Section 80CCD (1) will allow investors to save tax up to ₹1.5 lakhs.
2. Extra deduction can be made for ₹50,000 u/s 80CCD (1B).
3. Employees must maximise their employer’s contribution to the NPS account under Section 80CCD (2). 
4. There is no higher limit on employer contribution, and it will not affect Section 80C or Section 80CCD (1) deductions.
5. For salaried employees, tax deductions exceeding ₹2 lakhs a year can be claimed based on personal and employer contributions.

Example:

An individual is a Central Govt. employee, and they contribute to the NPS. Their total annual contribution towards the NPS account shall be Rs. 70,000. All of it comes from them and their employer. The salary structure is:

• Basic Salary: Rs. 2,20,000
• DA: Rs. 80,000
• Other Allowances and Perquisites: Rs. 2,00,000
• Investments done under 80C: Rs. 80,000

He can also claim the following deductions:

For Section 80CCD(1), this individual can claim the lesser of the two, namely

• For NPS contribution ₹35,000
• 10% of his basic salary + DA ₹30,000.

Since the limit at the 10% level is ₹30,000, and the unclaimed Section 80C limit is ₹70,000, they can claim ₹30,000 under Section 80CCD(1).

Under Section 80CCD(2), they can bring a deduction on the employer contribution of ₹35,000 as done by their employer. The maximum employer contributions are 14% of the basic salary and DA, which works out to be ₹42,000. Since the employer had contributed an amount of ₹35,000, he can bring the same as a deduction under Section 80CCD(2).

Conclusion

It is significant to understand everything about deductions under 80CCD and learn the important distinctions between 80CCD(1), 80CCD(1B), and 80CCD(2). National Pension Scheme is a secure long-term retirement plan for investors to safeguard an amount for their retirement.

The tax-saving benefit makes it a sound investment option, helping investors better plan their finances for the long run. To learn more about tax savings and plan future savings carefully, getting a clear idea of the tax savings under 80CCD is essential.

FAQs

1. Is the National Pension Scheme regulated by a public or private entity?

NPS is governed by the Pension Fund Regulatory and Development Authority, which comes under the Central Government.

2. Is deduction under the 80CCD National Pension Scheme limited to ₹1,50,000?

No!

The cumulative deduction is ₹1,50,000under section 80C, 80CCC and 80CCD(1). Investors can also claim ₹50,000 under section 80CCD(1B), which makes the overall deduction of ₹2,00,000. 

3. Can investment in LIC attract some amount of deduction under Section 80CCD(1B)?

No, 80CCD(1B) deductions are only for NPS contributions. But premiums paid for Life Insurance are applicable under Section 80C, with a cap of ₹1,50,000 in case investors are still using the old tax regime.

4. Who can claim to deduct money under 80CCD(1B)?

Only the person investing his/her amount in a Tier 1 NPS account can claim his deduction under this section. The contribution towards the Tier 2 NPS account has no tax under 80CCD(1B).

5. What are the top three strategies to increase tax savings under Section 80CCD National Pension Scheme?

Maximising employee contributions, the extra deduction for ₹50,000 u/s 80CCD (1B), and maximising employer contributions are effective strategies for tax savings.