Section 80CCD Benefits for NPS Subscribers
- Dipali Waghmode
- Apr 14
- 9 min read
Section 80CCD of the Income Tax Act offers targeted tax benefits to individuals investing in the National Pension System (NPS) or Atal Pension Yojana (APY). Divided into subsections: 80CCD(1), 80CCD(1B), and 80CCD(2)—this provision enables both salaried and self-employed taxpayers to reduce their taxable income through personal and employer contributions. While some benefits apply only under the old tax regime, others extend beyond it, including the newly introduced NPS Vatsalya scheme. Understanding how each subsection works and what regime they apply to is essential for optimizing tax savings and building long-term retirement security.
Table of Content
What Is Section 80CCD of the Income Tax Act?
Section 80CCD offers tax deductions on contributions made to the National Pension System (NPS) and the Atal Pension Yojana (APY). It forms part of Chapter VI-A deductions and is aimed at encouraging long-term retirement planning among Indian citizens.
The section is divided into three parts:
80CCD(1): Deduction for employee or self-employed contributions to NPS.
80CCD(2): Deduction for employer’s contributions to NPS.
80CCD(1B): An additional benefit beyond the usual limit for voluntary individual contributions.
Each part serves a unique role in offering tax savings and building retirement wealth through disciplined investment in government-backed pension schemes.
Is Section 80CCD Allowed in the New Tax Regime?
Under the new tax regime introduced in FY 2020-21 (Section 115BAC), most deductions under Chapter VI-A are not available. Section 80CCD(1), 80CCD(1B), and 80CCD(2) fall under this category, but with important distinctions.
80CCD(1) and 80CCD(1B) are not allowed under the new tax regime.
80CCD(2), which covers employer contributions, remains allowed even under the new tax regime.
This makes 80CCD(2) a critical tax-saving tool for salaried individuals choosing the new regime, while those aiming to claim deductions under 80CCD(1) or 80CCD(1B) must opt for the old regime.
How Section 80CCD(1) Works in the Old Tax Regime
Section 80CCD(1) provides a deduction to individuals contributing to their NPS accounts. The deduction applies only to contributions made to Tier I accounts and is subject to specific income thresholds.
Eligibility:
Available to both salaried and self-employed individuals.
Applicable only under the old tax regime.
Deduction Limits:
For salaried individuals: Deduction is limited to 10% of the salary (basic + dearness allowance).
For self-employed individuals: Deduction is allowed up to 20% of gross total income.
The maximum amount claimable under this section is ₹1.5 lakh, which is shared with Sections 80C and 80CCC under the overall ceiling of Section 80CCE. Any amount above this can still earn tax benefit under Section 80CCD(1B), provided it qualifies.
How Section 80CCD(2) Offers Benefits to Salaried Employees
Section 80CCD(2) provides an exclusive tax benefit to salaried employees based on employer contributions to the National Pension System (NPS). This deduction is not available to self-employed individuals, making it a valuable advantage for those working in the private or public sector.
The deduction under this provision is over and above the standard ₹1.5 lakh limit under Section 80CCE. It allows a deduction of:
Up to 14% of salary (Basic + DA) for Central Government employees (effective FY 2025–26).
Up to 10% of salary (Basic + DA) for other employees.
The actual deduction is limited to the amount contributed by the employer, ensuring tax relief without placing an upper monetary cap. Since this is not part of the ₹1.5 lakh overall limit, employees can enjoy substantial tax savings—especially in organizations with generous NPS matching policies.
Additionally, these contributions are exempt only under the old tax regime. Employees opting for the new regime cannot claim this benefit, regardless of employer contributions.
What Is Section 80CCD(1B) and Who Can Claim It?
Section 80CCD(1B) offers an additional tax deduction of up to ₹50,000 exclusively for contributions made to the NPS Tier I account. This benefit is separate from the ₹1.5 lakh limit under Section 80C and 80CCD(1), allowing individuals to boost their tax savings significantly.
Any individual, salaried or self-employed—who voluntarily contributes to an NPS Tier I account is eligible for this deduction. It provides a strategic opportunity to lower taxable income while simultaneously building a retirement corpus.
However, this deduction is only applicable under the old tax regime. Taxpayers who opt for the new regime forgo this benefit, making the choice of tax regime a crucial factor in retirement planning.
This provision also allows taxpayers who have already exhausted their Section 80C limit to further invest in NPS and continue receiving tax advantages.
Are NPS Vatsalya Contributions Eligible for Tax Deduction?
As per announcements made in Budget 2025, contributions to the NPS Vatsalya account now qualify for tax benefits under Section 80CCD(1B). This scheme was introduced as a targeted financial planning tool for the welfare of children, and its inclusion under the tax umbrella adds a new dimension to parental investments.
The Vatsalya account functions similarly to the standard NPS Tier I account but is tailored for securing a child’s financial future. Contributions made by parents or legal guardians are eligible for the same ₹50,000 deduction limit under Section 80CCD(1B).
Importantly, this deduction, like others under Section 80CCD, is only available under the old tax regime. Taxpayers must ensure they have selected the correct regime in their income tax return to claim this benefit.
By combining long-term wealth creation with tax efficiency, the Vatsalya account reinforces NPS’s role as a comprehensive financial instrument across life stages.
Who Can Claim Tax Deductions Under Section 80CCD?
Section 80CCD applies to individuals contributing to the National Pension System (NPS) or the Atal Pension Yojana (APY). Both salaried and self-employed individuals are eligible, subject to certain conditions.
Salaried employees can claim deductions for their own contributions under Section 80CCD(1) and employer’s contributions under Section 80CCD(2).
Self-employed individuals are entitled to claim deductions under Section 80CCD(1) for contributions made on their own behalf.
The additional deduction under Section 80CCD(1B), introduced to enhance retirement savings, is available to all individuals who invest in NPS Tier I, irrespective of their employment status.
Central Government employees, after the implementation of the NPS, are automatically covered and benefit from both subsections (1) and (2).
These benefits are available only under the old tax regime, as the new tax regime does not permit exemptions under Section 80CCD.
Contribution Limits and Deduction Caps Under Section 80CCD
Deductions under Section 80CCD are structured across three subsections, each with distinct limits based on the nature of the contribution:
Section 80CCD(1) – Employee/Self-Contribution
Salaried individuals: Deduction is limited to 10% of salary (Basic + DA).
Self-employed individuals: Eligible for up to 20% of gross total income.
The overall cap under this section falls within the ₹1.5 lakh limit of Section 80CCE, which includes Sections 80C, 80CCC, and 80CCD(1).
Section 80CCD(1B) – Additional Deduction
Provides a deduction up to ₹50,000 for contributions to NPS Tier I.
This is over and above the ₹1.5 lakh limit under Section 80CCE.
Particularly beneficial for individuals seeking to maximize their tax savings under the old regime.
Section 80CCD(2) – Employer Contribution
Deduction is limited to 14% of salary (Basic + DA) for central government employees.
For other employees, the limit remains 10% of salary (Basic + DA).
There is no monetary cap under this section, as the deduction is based on the actual contribution made by the employer.
Each subsection functions independently, allowing eligible subscribers to optimize tax savings through a combination of personal and employer contributions.
NPS Tier I vs Tier II: What Qualifies for Section 80CCD Benefits?
Only investments made in the NPS Tier I account qualify for tax deductions under Section 80CCD. This tier is designed for long-term retirement planning and comes with a lock-in period until the age of 60, ensuring the subscriber maintains retirement discipline.
Tier I Account:
Eligible for Section 80CCD(1), 80CCD(1B), and 80CCD(2) deductions.
Funds are partially withdrawable after 3 years under specific conditions.
Withdrawals at retirement are tax-exempt up to 60% of the corpus.
Tier II Account:
Functions like a voluntary investment account with no tax deductions under Section 80CCD.
Provides liquidity and no lock-in period.
Useful for wealth creation but does not offer tax-saving benefits.
In summary, only Tier I investments are considered for tax relief, making them the core component of any tax-saving strategy under the NPS framework.
Required Documents to Claim Section 80CCD Deductions
To successfully claim deductions under Section 80CCD, proper documentation is essential during income tax filing. Whether you're contributing as an individual or receiving employer contributions, the following documents serve as valid proof:
NPS Transaction Statement: A consolidated annual statement showing all contributions made during the financial year to your NPS Tier I account.
Receipt or Acknowledgment of Payment: If contributions are made offline or outside of payroll, retain receipts generated from the NPS portal or bank.
Employer’s Salary Certificate: For salaried individuals claiming 80CCD(2) benefits, a salary breakup reflecting employer NPS contributions is necessary.
Form 16 (if applicable): Contains the NPS deduction details pre-filled under Section 80CCD(1) or 80CCD(2) if contributions were routed through salary.
Proof of NPS Vatsalya Contributions: For those investing in the Vatsalya scheme, an account statement or contribution record is essential to claim 80CCD(1B) benefits.
Ensure these documents are readily available and preserved until the assessment process concludes, especially if the Income Tax Department raises a query.
Comparison of Section 80CCD(1), (1B), and (2)
Understanding the nuances of the three subsections of Section 80CCD helps in optimizing deductions effectively:
Feature | Section 80CCD(1) | Section 80CCD(1B) | Section 80CCD(2) |
Applicable To | Individuals (salaried/ self-employed) | Individuals (voluntary contributions) | Salaried employees (employer’s contribution) |
Maximum Deduction | ₹1.5 lakh (part of 80CCE limit) | ₹50,000 (additional, over 80CCE limit) | Up to 14% of salary (Basic + DA) for FY 2025-26 |
Tax Regime Applicability | Only under old tax regime | Only under old tax regime | Allowed in both tax regimes |
Mode of Contribution | Individual’s own contribution to NPS | Voluntary contributions beyond 80CCD(1) | Employer’s contribution to employee’s NPS |
Eligible Account Type | Tier I | Tier I (including NPS Vatsalya from FY 2025-26) | Tier I |
The combination of all three sections enables taxpayers to push their retirement savings while also lowering taxable income, provided they opt for the old regime where applicable.
Conclusion
Section 80CCD continues to offer a strategic edge for those focused on long-term retirement planning while aiming to reduce tax liability under the old regime. By aligning personal and employer contributions thoughtfully across 80CCD(1), (1B), and (2), taxpayers can unlock substantial deductions—going beyond the standard ₹1.5 lakh limit through the additional ₹50,000 under 1B and uncapped employer inputs under 2.
However, regime selection plays a decisive role. Those who opt for the new tax regime must note the limited applicability, especially as benefits like 80CCD(1B) remain exclusive to the old regime. For maximum tax efficiency, especially for salaried individuals, leveraging the employer contribution route under 80CCD(2)—which remains valid across regimes—can still add meaningful value.
When used wisely and supported with proper documentation, Section 80CCD becomes not just a tax-saving tool but a disciplined investment strategy for securing one’s financial future.
FAQs
What is the total deduction available under Section 80CCD?
An individual can claim up to ₹2,00,000 in deductions under Section 80CCD, which includes:
Up to ₹1.5 lakh under Section 80CCD(1), subject to the overall 80C limit.
An additional ₹50,000 under Section 80CCD(1B), over and above the 80C ceiling.
Can Section 80CCD(1B) be claimed under the new tax regime?
No, deductions under Section 80CCD(1B) are not available if the new tax regime under Section 115BAC is opted for. These benefits are exclusive to the old tax regime.
Is there a cap on employer contributions under Section 80CCD(2)?
Yes. For FY 2025-26 onwards, the deduction is capped at 14% of salary (Basic + DA) for all employees, whether in the government or private sector. The contribution must be made by the employer to qualify.
How do self-employed individuals benefit from Section 80CCD?
Self-employed taxpayers can claim a deduction under Section 80CCD(1) up to 20% of their gross total income, with the upper ceiling of ₹1.5 lakh falling under the combined 80C umbrella.
Are Atal Pension Yojana contributions eligible under Section 80CCD?
Yes. Contributions to the Atal Pension Yojana qualify under Section 80CCD(1), subject to the same deduction limits and conditions applicable to NPS Tier I contributions.
What is the tax treatment of NPS withdrawals?
Upon maturity, 60% of the total corpus withdrawn is tax-free. The remaining 40% must be used to purchase an annuity, which is taxable as income in the year of receipt.
How can I submit proof of NPS contributions while filing ITR?
You can provide the transaction statement downloaded from your NPS account or furnish receipts of voluntary contributions. These documents serve as valid proof while e-filing.
Is Section 80CCD(1) part of the 80C limit?
Yes. Deductions under Section 80CCD(1) fall within the combined limit of ₹1.5 lakh set under Section 80CCE, which includes 80C, 80CCC, and 80CCD(1).
Can NRIs claim deductions under Section 80CCD?
Yes. NRIs contributing to the NPS Tier I account can claim deductions under Section 80CCD(1), subject to the same limits applicable to residents. However, 80CCD(2) is not typically relevant unless they are salaried in India.
What is the difference between 80CCD and 80C?
Section 80C covers a range of investment options like PPF, ELSS, and life insurance. Section 80CCD is specifically for contributions to NPS and APY. Both fall under the 80CCE combined ceiling, except for 80CCD(1B), which offers an extra deduction.
Can I claim both 80CCD(1B) and 80C together?
Yes. An individual can claim ₹1.5 lakh under 80C/80CCD(1), plus an additional ₹50,000 under 80CCD(1B), bringing the total possible deduction to ₹2,00,000 for NPS subscribers.
Do Tier II NPS contributions qualify for Section 80CCD deductions?
No. Contributions to the Tier II account are not eligible for any tax deductions under Section 80CCD unless the subscriber is a government employee and specific conditions are met under separate notifications.
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