Section 80CCD of Income Tax Act: NPS & APY Deductions Explained (AY 2025-26 & AY 2026-27 Updates)
- Rashmita Choudhary
- Jul 21
- 12 min read
Smart retirement planning often involves saving tax efficiently. Section 80CCD helps you achieve this by offering deductions on contributions to the National Pension System (NPS) and Atal Pension Yojana (APY), thereby encouraging long-term savings. This guide will explain the various subsections of 80CCD, their limits, who can claim them, how they work with different tax regimes, and recent updates affecting your savings for Assessment Years 2025-26 and 2026-27. You can learn more about income tax provisions through the Income Tax Department.
Table of Content
What is Section 80CCD of the Income Tax Act, 1961?
Section 80CCD of the Income Tax Act, 1961, is a very useful tool for individuals planning for their retirement and looking to save on taxes. This section allows taxpayers to claim deductions for money they put into specific pension schemes, namely the National Pension System (NPS) and the Atal Pension Yojana (APY). The main idea behind Section 80CCD is to motivate people to build a good retirement fund. This article will explain the different parts of Section 80CCD, like 80CCD(1), 80CCD(1B), and 80CCD(2). It will also cover the deduction limits, who is eligible, how it applies under the old versus new tax systems, and any new changes. Understanding the NPS tax benefit and APY tax benefit can significantly help in reducing your taxable income while securing your future.
Understanding the Subsections of Section 80CCD
To make things clearer, Section 80CCD is split into three main parts, each dealing with different types of contributions. The subsections of 80CCD are: Section 80CCD(1), which covers contributions made by the individual taxpayer themselves. Then there's Section 80CCD(1B), which allows for an additional deduction for self-contributions specifically to NPS or APY. Lastly, Section 80CCD(2) deals with contributions made by an employer to an employee's pension account. It's important to know that each of these subsections—80CCD(1) explained, 80CCD(1B) explained, and 80CCD(2) explained—has its own specific rules and maximum deduction amounts.
Section 80CCD(1): Deduction for Self-Contribution (Employee/Self-Employed)
Section 80CCD(1) of the Income Tax Act allows individuals to claim a deduction for their own contributions to the National Pension System (NPS) or Atal Pension Yojana (APY). This 80CCD(1) deduction limit is available to both salaried employees and self-employed individuals. To be eligible, a person must be an Indian citizen, and for NPS, the age should generally be between 18 and 70 years. As per the Income Tax Act, 1961, the rules for deduction under 80CCD(1) for salaried employees state they can claim up to 10% of their salary, where 'salary' means Basic Salary plus Dearness Allowance (DA). For 80CCD(1) for self-employed individuals, the limit is 20% of their gross total income.
It's quite important to remember that this deduction under Section 80CCD(1) NPS or 80CCD(1) APY is part of the overall Rs. 1.5 lakh limit specified under Section 80CCE. The 80CCE limit also includes other popular deductions like those under Section 80C (for things like PPF, EPF, LIC premiums) and Section 80CCC (for contributions to certain annuity plans). This particular benefit is primarily available if you choose to file your taxes under the Old Tax Regime. For more on Section 80C, you might find understanding Section 80C useful.
An example calculation for a salaried individual:
Basic Salary: Rs. 8,00,000
Dearness Allowance (DA): Rs. 2,00,000
Total Salary for 80CCD(1): Rs. 10,00,000
Maximum 80CCD(1) deduction: 10% of Rs. 10,00,000 = Rs. 1,00,000 (subject to overall 80CCE limit)
An example calculation for a self-employed individual:
Gross Total Income: Rs. 12,00,000
Maximum 80CCD(1) deduction: 20% of Rs. 12,00,000 = Rs. 2,40,000 (but restricted to Rs. 1.5 lakh under 80CCE if no other 80C/80CCC investments are made, or less if those are also claimed).
Section 80CCD(1B): Additional Deduction for NPS/APY Contribution
Section 80CCD(1B) additional deduction is a fantastic way for taxpayers to save even more tax, specifically by encouraging investments in the National Pension System (NPS) and Atal Pension Yojana (APY). This subsection, introduced via Finance Act, 2015, allows for an extra deduction of up to Rs. 50,000. What makes the 80CCD(1B) Rs 50000 benefit especially attractive is that this deduction is over and above the common Rs. 1.5 lakh limit that falls under Section 80CCE (which covers 80C, 80CCC, and 80CCD(1)). This means, by using 80CCD(1B) NPS or APY, you can effectively increase your total tax-saving deductions.
Both salaried individuals and self-employed persons can claim this benefit. The contribution must be made to an NPS Tier 1 account or to an APY account. This provision helps people save tax with 80CCD(1B) and is predominantly available to those who opt for the Old Tax Regime.
For instance, if someone has already used up their Rs. 1.5 lakh limit under Section 80C through other investments, they can still invest Rs. 50,000 in NPS (Tier 1) and claim this additional deduction, making their total deduction Rs. 2 lakhs (Rs. 1.5 lakh under 80CCE + Rs. 50,000 under 80CCD(1B)).
Section 80CCD(2): Deduction for Employer's Contribution to NPS
Section 80CCD(2) employer contribution relates to the contributions an employer makes to an employee's National Pension System (NPS) account. This NPS employer contribution tax benefit is available only to salaried individuals. A significant advantage of 80CCD(2) is that this deduction is over and above the Rs. 1.5 lakh limit under Section 80CCE and the additional Rs. 50,000 under Section 80CCD(1B). So, it offers a further avenue for tax saving.
The 80CCD(2) limit depends on the type of employer and the tax regime chosen. Under the Old Tax Regime (AY 2025-26):
For Central Government or State Government employees: The deduction can be up to 14% of their salary (Basic + Dearness Allowance).
For other employees (like those in the private sector): The deduction is capped at 10% of their salary (Basic + DA).
Under the New Tax Regime (AY 2025-26 / FY 2024-25):
For Central Government or State Government employees: The deduction can be up to 14% of their salary (Basic + DA).
For other employees (Private Sector): The deduction is up to 10% of their salary (Basic + DA).
There's a crucial update for the New Tax Regime, effective from AY 2026-27 (FY 2025-26), due to the Finance Act 2024. The Finance Act 2024 80CCD(2) change means that for private sector employees opting for the new tax regime, the employer's contribution limit for deduction under Section 80CCD(2) will increase to 14% of salary (Basic + DA). This brings parity with government employees under the new tax regime. You can read more about 80CCD(2) under the new tax regime.
Here's a small table summarizing the limits for 80CCD(2):
Summary of Deduction Limits under Section 80CCD (Old vs. New Tax Regime)
This 80CCD deduction summary provides a clear overview of the tax benefits available. The 80CCD limits table below helps compare the deductions under Section 80CCD(1), Section 80CCD(1B), and Section 80CCD(2) for both the old and new tax regimes, including upcoming changes. This comparison of tax benefits under 80CCD for the old vs new tax regime should clarify how individuals can plan their investments.
*GTI = Gross Total Income. Salary = Basic + Dearness Allowance. Data is based on current understanding of the Income Tax Act and recent updates.
Eligibility Criteria for Claiming 80CCD Deductions
The eligibility for 80CCD deductions requires meeting certain conditions. Firstly, the taxpayer must be an individual; Hindu Undivided Families (HUFs) cannot claim this deduction. The individual should generally be a Resident Indian. However, Non-Resident Indians (NRIs) can also contribute to the National Pension System (NPS) and claim deductions under Section 80CCD, subject to NPS rules and age limits (typically 18-70 years for NPS). The age limit for NPS deduction is crucial for subscribers.
Contributions must be made to pension schemes notified by the Central Government, which are currently the NPS and the Atal Pension Yojana (APY). For Section 80CCD(1) and Section 80CCD(1B), both salaried and self-employed individuals are eligible. However, Section 80CCD(2), which pertains to the employer's contribution, is applicable only to salaried individuals.
Key eligibility points:
Must be an individual taxpayer.
Can be a Resident Indian or an NRI (for NPS).
Age for NPS contribution: Generally 18 to 70 years.
Contributions must be to NPS or APY.
80CCD(1) & (1B): Salaried and Self-employed.
80CCD(2): Salaried individuals only (for employer's part).
How Does Section 80CCD Interact with Section 80C and 80CCC?
Understanding the interplay between 80CCD and 80C, as well as 80CCC, is important for maximizing tax savings. Contributions made under Section 80CCD(1) are part of the combined Rs. 1.5 lakh deduction limit available under Section 80CCE. Section 80CCE clubs together deductions from Section 80C (which includes investments like PPF, ELSS, life insurance premiums, etc.), Section 80CCC (for contributions to certain pension funds from insurers), and Section 80CCD(1). This means the total deduction you can claim across these three sections cannot exceed Rs. 1.5 lakh. You can find more details of Section 80C deductions to plan better.
However, the 80CCD vs 80C distinction becomes clearer with Section 80CCD(1B). The additional deduction of up to Rs. 50,000 under Section 80CCD(1B) is exclusive and sits over and above this Rs. 1.5 lakh limit. So, the total deduction including 80C, 80CCD(1), and 80CCD(1B) can go up to Rs. 2 lakh.
Furthermore, the deduction for an employer's contribution under Section 80CCD(2) is entirely separate. It does not fall under the Rs. 1.5 lakh (80CCE) or the additional Rs. 50,000 (80CCD(1B)) caps related to self-contributions. This makes it an additional avenue for tax relief for salaried employees. A simplified way to see the 80CCE explained is: (80C + 80CCC + 80CCD(1) ≤ Rs. 1.5 lakh) + 80CCD(1B) (≤ Rs. 50,000) + 80CCD(2) (as per % of salary).
National Pension System (NPS) and Section 80CCD
The National Pension System (NPS) 80CCD benefits are a cornerstone of retirement planning for many, as NPS is the primary investment vehicle for these deductions. NPS is a government-backed, long-term retirement savings scheme designed to provide a regular income post-retirement. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). When discussing NPS, it's useful to understand the difference between its account types. Section 80CCD deductions are mainly applicable to contributions made to the NPS Tier 1 account. The NPS Tier 1 tax benefit is what attracts most investors looking for tax savings, as this account has restrictions on withdrawals to ensure long-term saving. NPS Tier 2 contributions, while offering more flexibility for withdrawals, generally do not qualify for deductions under Section 80CCD(1) or 80CCD(1B).
All three subsections of 80CCD apply to NPS contributions:
80CCD(1): For self-contributions to NPS Tier 1.
80CCD(1B): For an additional self-contribution of up to Rs. 50,000 to NPS Tier 1.
80CCD(2): For employer's contributions to an employee's NPS Tier 1 account. For planning your NPS investments, an NPS calculator can be helpful.
Atal Pension Yojana (APY) and Section 80CCD
The Atal Pension Yojana (APY) 80CCD benefits also provide a valuable way for individuals, especially those in the unorganized sector, to save for retirement and get tax deductions. APY is a Government of India scheme designed to offer a guaranteed minimum pension to subscribers after they reach the age of 60. The pension amount depends on the contribution level and the age at which the individual starts investing.
Contributions made to the Atal Pension Yojana qualify for tax deductions under Section 80CCD. Specifically, an individual can claim a deduction for APY contributions under Section 80CCD(1), which falls within the overall Rs. 1.5 lakh limit of Section 80CCE. Additionally, APY contributions are also eligible for the extra Rs. 50,000 deduction under Section 80CCD(1B) APY. This makes APY an attractive option for those looking for a secure pension and tax savings.
How to Claim Deductions Under Section 80CCD
Claiming deductions under Section 80CCD involves a few straightforward steps. To successfully claim NPS deduction in ITR or APY benefits, individuals should ensure their contributions are made within the relevant financial year (April 1st to March 31st). It is crucial to maintain proof of investment, such as the NPS or APY account statements. These documents serve as the 80CCD proof of investment.
For salaried individuals, the process of how to claim 80CCD can be simplified by informing their employer about their NPS contributions. The employer can then factor these contributions into the calculation of Tax Deducted at Source (TDS) and reflect them in Form 16. Regardless of whether the employer considers it or not, individuals must declare these contributions when filing their Income Tax Return (ITR). The deductions are claimed under the relevant schedules, typically Schedule VI-A, which deals with deductions under Chapter VI-A of the Income Tax Act. These deductions can usually be claimed in ITR forms such as ITR-1, ITR-2, ITR-3, or ITR-4, depending on the individual's sources of income. It's always a good practice to be diligent while filing your Income Tax Return.
Steps to claim the deduction:
Make contributions to NPS/APY within the financial year.
Keep your NPS/APY transaction statements or receipts as proof.
If salaried, inform your employer to adjust TDS and include it in Form 16.
Declare the eligible deduction amount in the appropriate schedule of your ITR form.
Common Mistakes to Avoid When Claiming 80CCD Deductions
Avoiding mistakes when claiming 80CCD deductions can save taxpayers from potential issues with the tax department. A common error in claiming an NPS deduction involves exceeding the specified percentage of salary or gross total income under Section 80CCD(1) – that is, 10% of salary (Basic + Dearness Allowance) for salaried individuals or 20% of Gross Total Income for self-employed individuals. Another frequent pitfall is not correctly separating the Section 80CCD(1B) claim of Rs. 50,000 from the overall Rs. 1.5 lakh limit under Section 80C; 80CCD(1B) is an additional benefit.
One of the significant mistakes 80CCD claim filers make is trying to claim deductions under Section 80CCD(1) or Section 80CCD(1B) if they have opted for the New Tax Regime, as these are generally not allowed under it (only Section 80CCD(2) is typically available in the new regime, unless a specific future amendment allows otherwise). Salaried individuals sometimes forget to claim the deduction for their employer's contribution under Section 80CCD(2), if such a contribution has been made. Not maintaining proper documentation like NPS or APY statements is another oversight that can lead to problems. Lastly, misunderstanding the definition of "salary" for deduction purposes is a common error; it usually only includes Basic Salary and Dearness Allowance, not other allowances.
To avoid 80CCD mistakes:
Don't exceed the 10%/20% limits for 80CCD(1).
Claim 80CCD(1B) as an additional, separate deduction.
Remember 80CCD(1) and 80CCD(1B) are generally not for the New Tax Regime.
Don't forget to claim 80CCD(2) if your employer contributes.
Keep all your investment proofs handy.
Use the correct definition of 'salary' (Basic + DA).
Conclusion: Maximizing Your Tax Savings with Section 80CCD
To maximize 80CCD benefits, understanding its provisions is key for robust retirement planning and effective tax saving. Section 80CCD offers a substantial opportunity to reduce taxable income by investing in the National Pension System (NPS) and Atal Pension Yojana (APY). Taxpayers can potentially claim a total self-contribution deduction of up to Rs. 2 lakh (Rs. 1.5 lakh under Section 80CCD(1) within the 80CCE limit, plus an additional Rs. 50,000 under Section 80CCD(1B)). On top of this, salaried individuals can also benefit from their employer's contribution under Section 80CCD(2), which has its own separate limits.
Proactive investment in NPS/APY not only helps in building a significant retirement corpus but also provides immediate tax relief. When planning your tax saving 80CCD strategy, it's also important to consider which tax regime – old or new – is more beneficial for your individual financial situation, as the availability of these deductions varies significantly between the two. For personalized guidance, you might consider using Taxbuddy's expert tax advisory services.
Frequently Asked Questions (FAQs) about Section 80CCD
What is the maximum deduction under Section 80CCD?
The maximum self-contribution deduction can be up to Rs. 2 lakh (Rs. 1.5 lakh under 80CCD(1) clubbed with 80C/80CCC, and an additional Rs. 50,000 under 80CCD(1B)). Employer's contribution under 80CCD(2) is separate and depends on a percentage of salary.
Is 80CCD(1B) part of 80C?
No, Section 80CCD(1B) provides an additional deduction of up to Rs. 50,000 over and above the Rs. 1.5 lakh limit of Section 80C (which is part of Section 80CCE).
Can I claim both 80CCD(1) and 80CCD(1B)?
Yes, if you are eligible and make sufficient contributions, you can claim deductions under both Section 80CCD(1) (within the 80CCE limit) and the additional Rs. 50,000 under Section 80CCD(1B).
Is 80CCD available under the new tax regime?
Generally, only the employer's contribution under Section 80CCD(2) is available as a deduction under the new tax regime. Deductions under 80CCD(1) and 80CCD(1B) are typically not allowed in the new regime.
What is the meaning of 'salary' for Section 80CCD?
For Section 80CCD purposes, 'salary' typically means Basic Salary plus Dearness Allowance (DA).
Can NRIs claim 80CCD benefits?
Yes, Non-Resident Indians (NRIs) can contribute to the National Pension System (NPS) and claim deductions under Section 80CCD, subject to NPS rules and regulations.
Is Atal Pension Yojana (APY) eligible for 80CCD(1B)?
Yes, contributions to Atal Pension Yojana are eligible for the additional deduction of up to Rs. 50,000 under Section 80CCD(1B).
What is the difference between 80CCD(1) and 80CCD(2)?
Section 80CCD(1) is for an individual's own contributions to NPS/APY. Section 80CCD(2) is for the employer's contribution to an employee's NPS account.
When was Section 80CCD(1B) introduced?
Section 80CCD(1B) was introduced through the Finance Act, 2015, to provide an additional deduction for NPS contributions.
Is the employer's NPS contribution under 80CCD(2) fully tax-free for the employee?
The employer's contribution to NPS is deductible under Section 80CCD(2) up to a specified percentage of the employee's salary (10% or 14%, depending on the employer type and tax regime). Any contribution above this limit might become taxable.
How will the Finance Act 2024 change Section 80CCD(2) for private employees in the new tax regime?
Effective from Assessment Year 2026-27 (Financial Year 2025-26), the Finance Act 2024 has increased the deduction limit for employer's NPS contributions under Section 80CCD(2) for private sector employees under the new tax regime from 10% to 14% of salary (Basic + DA), aligning it with government employees.
Can I claim 80CCD for NPS Tier 2 contributions?
Generally, no. Deductions under Section 80CCD(1) and 80CCD(1B) are primarily for contributions to NPS Tier 1 accounts. NPS Tier 2 contributions are usually not eligible for these specific tax deductions.
Do I need to submit proof for 80CCD deductions?
Yes, you should maintain your NPS/APY contribution statements as proof. You need to declare the deduction amount in your Income Tax Return (ITR).
Is pension received from NPS taxable?
Yes, the annuity or pension amount received from NPS is generally taxed as income in the year of receipt, as per the applicable income tax slab rates.
What is the overall limit including 80C, 80CCC and 80CCD?
The combined limit under Section 80C, Section 80CCC, and Section 80CCD(1) is Rs. 1.5 lakh (governed by Section 80CCE). Section 80CCD(1B) offers an additional, separate deduction of up to Rs. 50,000. Employer contributions under 80CCD(2) are over and above these limits.
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