Section 80CCD(1B): Deduction for Contribution to Pension Scheme of Central Government
Updated: Oct 1
The Central Government enacted the National Pension System (NPS) in the year 2004 with the sole objective of providing benefits to the senior citizens and safeguarding their financial interests after retirement. When an individual subscribes to the NPS account, a Permanent Retirement Account Number (PRAN) is allotted to him. The subscriber contributes regularly towards the NPS account while on employment and creates a corpus for the retirement. After retirement, the corpus is made available to the subscriber with some restriction on withdrawal.
Based on the intent behind the inception of NPS, this article will assist the reader to understand the income tax implications of NPS and how he can avail the maximum benefits from investment made in NPS.
Table of Content
Section 80CCD
Section 80CCD allows individuals to claim deductions for contributions made towards the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). Not just employee contributions but employers contributions towards the pension scheme are also allowed under Section 80CCD. Section 80CCD(1) allows deduction for contributions made either by salaried individuals or non-salaried individuals towards the National Pension Scheme. Whereas, Section 80CCD(2) allows deduction for contributions made by employers towards the National Pension Scheme for employees. Only salaried employees can claim the benefit under Section 80CCD(2). However, as per Section 80CCE, a maximum of INR 1,50,000 can be claimed as a deduction under Section 80C, 80CCC and 80CCD(1) combinedly.
The deductions under Section 80CCD(1) are allowed to the individuals in the following manner:
For salaried employees: A maximum of 10% of salary (Basic + Dearness Allowance) can be claimed as a deduction.
For non-salaried individuals: A maximum of 20% of the gross total income (GTI) can be claimed as a deduction.
The deductions under Section 80CCD(2) are allowed to salaried employees in the following manner:
If the Employer is a Central Government Entity: A deduction of 14% of employee’s salary (Basic + Dearness Allowance) can be claimed as a deduction.
For all other Employers: A maximum of 10% of salary (Basic + Dearness Allowance) can be claimed as a deduction.
Section 80CCD(1B)
Section 80CCD(1B) provides an additional deduction over and above the deductions under Section 80CCD(1) and Section 80CCD(2). A deduction of INR 50,000 is allowed to individuals for contributions made towards the Notified Pension Scheme of the Central Government. This deduction is independent of the deduction allowed under Section 80CCD(1). Moreover, both salaried employees and self-employed individuals can claim deduction under Section 80CCD(1B).
Comparison between Section 80CCD(1), Section 80CCD(1B), and Section 80CCD(2)
Prerequisites to avail Deduction under Section 80CCD(1B)
To avail the deduction under Section 80CCD(1B) following conditions are to be satisfied:
Individuals whether resident or non-resident can make contributions to NPS.
An individual must be a minimum of 18 years of age to start contributions to NPS.
The maximum age limit of individuals is 70 years for making contributions to NPS.
In case of Non-Resident Indians (NRIs), the citizenship should remain intact as it was at the time of making investment in the scheme. Any change in the citizenship of NRIs will tantamount to termination of the scheme.
National Pension Scheme
A National Pension Scheme (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Under NPS, both government and non-government employees are allowed to make contributions for retirement. Earlier, only government-sector employees were allowed to make contributions towards NPS.
NPS allows the individual to make contributions towards the pension while they are employed which gets accumulated as a corpus. Post employment, an individual receives monthly income from this corpus. NPS offers following two types of account facilities from which an individual can choose when making pension contributions:
Tier I Account: Tier I Account is an annuity pension account which is to be mandatorily opened for contributing to the pension fund under NPS. This account comes with a typical feature of a fixed deposit. Whereby, there is a restriction for withdrawal of funds. The subscriber of the account cannot withdraw funds from Tier I Account until he attains 60 years of age. An additional lock-in of 10 years can be made by the subscriber after attaining 60 years of age. Moreover, partial withdrawals are allowed from this account upon satisfaction of certain conditions. Investments made in Tier I Account are eligible for tax benefits. This account can be closed prematurely provided the terms and conditions of premature withdrawal are satisfied.
Tier II Account: Tier II Account is similar to a normal saving bank account. This account allows the subscriber to withdraw money as and when required. However, the investments made in Tier II Accounts are not eligible for tax benefits. Only the Central Government employees are eligible to enjoy the tax benefits from investments made in Tier II Accounts. This account is voluntary in nature and can be opened by those subscribers who already have a Tier I Account.
Proposed Amendments in National Pension Scheme, 2023
With the assurance that the employees should get a retirement payment equivalent to at least 40-45% of their last drawn salary, the Government has proposed to introduce two major amendments to the National Pension Scheme (NPS) in October, 2023. The following are amendments made in NPS recently:
A subscriber will be allowed to withdraw 60% of the pension corpus. This withdrawal can be made on a monthly, quarterly, annual or semi-annual basis through a systematic lump-sum withdrawal facility. The maximum age limit of subscribers for withdrawal is 75 years of age or till he attains the age as mentioned in the application.
The other important amendment will be pertaining to the verification of bank accounts which has to be obtained by the subscriber immediately. This amendment is made to ensure that the subscribers will be able to receive the benefits of NPS in a timely manner into their bank accounts.
Various Options of investment in National Pension Scheme
The National Pension Scheme (NPS) provides both offline and online options for opening and operating NPS accounts. Each type of option is explained below:
An investment in the National Pension Scheme (NPS) can be made through a specified financial institution, which is also referred to as an offline mode of NPS investment. Such financial institutions should be authorized to act as a Point of Presence (POP). Today all banking and non-banking financial institutions are allowed to act as a POP. They are allowed to collect deposits from subscribers.
Another mode of investment in NPS is through an online medium. In this case, an individual can visit the online portal of NPS at https://enps.nsdl.com/eNPS/NationalPensionSystem.html and complete the online subscription.
Lock-in Period under National Pension Scheme
The lock-in period restriction exists only for the Tier I Account under the National Pension Scheme. Whereby the withdrawal from the corpus is not allowed till the individual attains 60 years of age.
On the contrary, Tier II Account does not provide with any lock-in period and allows free withdrawal of funds as per the convenience of the subscriber.
Investment Proof for claiming benefit under National Pension Scheme
An individual can claim the benefit under National Pension Scheme (NPS) under Section 80CCD(1) and Section 80CCD(1B) provided he possesses the following documents or proof:
PAN card
Proof of investment in NPS
Receipt of contribution made in Tier I Account
Important aspects of Section 80CCD(1B)
Following important points are to be kept in mind while availing benefit or deduction under Section 80CCD(1B):
Benefits of deduction under Section 80CCD(1B) can be availed by both salaried and self-employed individuals.
Only investments made under Tier I Accounts of NPS are eligible for deduction under Section 80CCD(1B).
Investments under Tier II Accounts of NPS are not eligible for deduction under Section 80CCD(1B).
Evidence of proof of investment is required to claim additional deduction under Section 80CCD(1B).
The additional deduction under Section 80CCD(1B) of INR 50,000 gives a total deduction of INR 2,00,000 to individuals under Section 80C. Thereby, increasing the limit of INR 1,50,000 to INR 2,00,000 as per Section 80CCE.
Withdrawals from NPS are subject to terms and conditions.
Tax Implications for purchase or withdrawal from the National Pension Scheme (NPS) Account
The following are tax implications of withdrawal from the NPS Account:
If there is a partial withdrawal from the corpus: The partial withdrawal from Tier I Account is exempt in the hands of the subscriber as per Section 10(12B) of the Income Tax Act, 1961.
If there is a lump sum withdrawal from the corpus: In the case of lump sum withdrawal of corpus, tax will not be levied up to 60% of the total amount of corpus. For instance, the value of the corpus in Mr. Buddy's NPS is INR 20,00,000. Then, a lump sum withdrawal of INR 12,00,000 will be allowed which would be tax-free. For balance 40%, that is, INR 8,00,000 should be used for annuity purchase.
Tax implications on purchase of Annuity: The investment made in the annuity plan of NPS is fully exempt. However, the receipt of annuity income in the following years will be subject to income tax.
FAQ
Q1. What is the significance of the Permanent Retirement Account Number (PRAN)?
PRAN is a 12-digit number issued by the National Securities Depository Limited (NSDL). It provides a unique identification to the subscribers of the National Pension Scheme (NPS). Once a PRAN is allocated, it cannot be changed throughout the life of the subscriber. PRAN allows subscribers to track all transactions related to NPS investments. It is useful while claiming pension benefits.
Q2. What is the difference between Section 80CCD(1) and Section 80CCD(1B)?
Section 80CCD(1) allows the deduction for contributions made towards National Pension Scheme (NPS) or Atal Pension Yojana (APY). However, the maximum deduction allowed under Section 80CCD(1) as per Section 80CCE is INR 1,50,000 only. Whereas, the deduction under Section 80CCD(1B) of INR 50,000 is allowed for contributions towards NPS alone over and above the deduction of INR 1,50,000.
Q3. Can an individual invest in the National Pension Scheme (NPS), if he has already invested in other Provident Funds?
Yes. An individual can make investments in NPS as it is a retirement benefit. It is independent of any investment made by individuals in provident funds.
Q4. Can an individual make contributions to his National Pension Scheme (NPS) account after attaining 60 years of age?
No. The age criteria for making an investment in an NPS account is between 18-60 years. Thus, after attaining 60 years of age, an individual cannot make investments in an NPS account.
Q5. Can an individual have more than one pension account under the National Pension Scheme (NPS)?
No. One subscriber can have only one pension account under NPS. Therefore, a single individual cannot have multiple NPS accounts.
Q6. Can an NRI have a pension account with the National Pension Scheme (NPS)?
Yes. Non-Resident Indians can have a pension account with NPS. However, they have to comply with the rules and regulations as and when issued by the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA). Moreover, any change in the citizenship of the NRI tantamounts to the closure of their NPS account.
Q7. Can an assessee Bifurcate the investments made under Tier I Account as per his convenience to claim deductions under Sections 80CCD(1) and 80CCD(1B)?
Yes. If the assessee does not have any NPS contributions from his employer under Sections 80CCD(1) and 80CCD(2) and he made voluntary investments in Tier I Account of NPS, he can claim a deduction under both Sections 80CCD(1) and 80CCD(1B). For example, if the assessee deposited INR 1,00,000 in Tier I Account, he can claim the entire amount under Section 80CCD(1) or he can claim INR 50,000 under Section 80CCD(1B) first, followed by the remaining amount under Section 80CCD(1).
Q8. What are the documents to be submitted at the time of filing an NPS withdrawal application?
Following documents are to be submitted along with the application for NPS withdrawal:
PRAN card
Attested copy of identity proof
Attested copy of address proof
Canceled cheque
Q9. Can an NPS subscriber defer his lump sum withdrawable amount of 60% at the exit time on attaining 60 years of age?
Yes. After reaching the age of 60 years, the subscriber can defer the withdrawal for an additional 10 years. As a result, a subscriber can defer the withdrawal of an eligible lump sum amount till he reaches the age of 70 years.
Q10. Can a deduction under Section 80CCD(1B) can be claimed under the New Tax Regime?
New Tax Regime does not allow individuals to claim commonly available deductions under Section 80C except for deduction under Section 80CCD(2). Therefore, deduction under Section 80CCD(1B) cannot be claimed under the New Tax Regime.
Q11. Can an individual opt for partial withdrawals from the National Pension Scheme (NPS)?
Yes, partial withdrawals are allowed under NPS, but they are subject to specific conditions. A subscriber can withdraw up to 25% of the contributions made by them for certain purposes such as higher education, marriage, purchase of a house, or for treating critical illnesses. The partial withdrawal can be done only after completing 3 years of joining the NPS, and it is limited to a maximum of 3 times during the entire tenure.
Q12. Is the maturity amount of NPS taxable?
At the time of exit from NPS, 60% of the accumulated corpus can be withdrawn as a lump sum, and this amount is tax-exempt. The remaining 40% must be used to purchase an annuity, and the annuity payments will be taxable as per the income tax slab of the individual in the year of receipt.
Q13. Can a subscriber switch between the Tier I and Tier II accounts of NPS?
Yes, a subscriber can transfer funds between the Tier I and Tier II accounts of NPS. However, Tier I contributions qualify for tax benefits, while Tier II contributions do not. Tier II accounts offer more flexibility in withdrawals and investments but do not offer tax deductions.
Q14. Can a corporate employer contribute to the NPS account of an employee?
Yes, a corporate employer can contribute to an employee's NPS account under Section 80CCD(2). This contribution is eligible for a tax deduction and does not have any monetary limit, but it should not exceed 10% of the employee's salary (basic + dearness allowance). This benefit is available under both the Old and New Tax Regimes.
Q15. Is NPS a mandatory scheme for employees of the government sector?
Yes, for employees who joined the central government or state governments after January 1, 2004, NPS is a mandatory retirement savings scheme. These employees contribute to NPS, and a matching contribution is made by the government.
Q16. What is the difference between Tier I and Tier II accounts in NPS?
Tier I Account: This is the primary account in NPS. Contributions to Tier I are locked in until the subscriber reaches 60 years of age, and withdrawals are subject to specific conditions. Contributions to Tier I qualify for tax deductions under Sections 80CCD(1) and 80CCD(1B).
Tier II Account: This is a voluntary account with no lock-in period. Contributions can be withdrawn at any time, and there are no tax deductions for contributions made to Tier II under the existing tax rules.
Q17. How is the NPS corpus managed?
The NPS corpus is managed by Pension Fund Managers (PFMs), who invest the contributions in a mix of equity, corporate debt, and government securities. Subscribers can choose their fund manager and decide their asset allocation as per their risk profile under the Active Choice or Auto Choice investment options.
Q18. Can the nominee receive the NPS corpus in case of the death of the subscriber?
Yes, in case of the unfortunate death of the subscriber, the entire accumulated NPS corpus is paid to the nominee or legal heir in a lump sum, and no annuity purchase is required. The nominee can withdraw the corpus tax-free.
Q19. Can a subscriber change their Pension Fund Manager (PFM)?
Yes, NPS allows flexibility to change the Pension Fund Manager (PFM). Subscribers can switch their PFM once in a financial year to align their investments with their goals or the fund's performance.
Q20. Is there any risk involved in investing in NPS?
Like any investment linked to market instruments, NPS investments carry risks, especially when a part of the contributions is allocated to equity. However, the risk is mitigated by the diversified portfolio that includes government securities and bonds. Over the long term, NPS has the potential to offer good returns while ensuring stability.
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