Section 80CCD(1)and 80CCD(2): Understanding Tax Benefits under NPS

The Income Tax Department has implemented multiple measures aimed at reducing individuals' tax obligations. Citizens are encouraged to invest in a variety of financial instruments via these regulations. Section 80C is a well-known tax provision that assists taxpayers in keeping track of their assets, savings, and expenditures for tax returns. The two main subsections of this tax provision are sections 80 CCD (1) and 80 CCD (2). Continue reading to learn more about eligibility, deductions, and other topics.

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Table of Contents

Beginning with the Basics: Tax Deduction under Section 80CCD

Tax Deduction under Section 80CCD(1)

Tax Deduction under Section 80CCD(1B)

Tax Deduction under Section 80CCD(2)

Conclusion

Most Asked Questions

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Beginning with the Basics: Tax Deduction under Section 80CCD

Tax exemptions under Section 80 CCD are applicable to contributions made under the government's pension plan. The National Pension Scheme (NPS) and the Atal Pension Yojana are two of the pension plans. Employers and employees can participate in the schemes and receive tax benefits. The following people are qualified to get tax benefits from their pension plan contributions: 

• Employees of the Central Government 

• Employees in private companies 

• Self-employed individuals

80 CCD is divided into two subsections: 80 CCD (1) and 80 CCD (2). Generally speaking, section 80 CCD (1) denotes the employee's contribution to NPS, while section 80 CCD (2) denotes the employer's contribution. Employers benefit from these deductions by receiving pensions after retirement. Let us explain these sections in detail.

Tax Deduction under Section 80CCD(1)

The deduction allowed for individual taxpayer donations to their own NPS account is covered by Section 80CCD(1). This covers the taxpayer's contributions to their Tier-I NPS account, regardless of whether they are self-employed or have a job. The particulars of Section 80CCD(1) are as follows:

• Deduction limit: According to the present regulations, under Section 80CCD(1), people may deduct up to 10% of their wage (for salaried individuals) or 20% of their gross total income (for self-employed individuals). 

• Total limit: The deduction allowed by Section 80CCD(1) falls within the ₹1.5 lakh total allowed by Section 80CCE, which also covers a number of other deductions under Sections 80C, 80CCC, etc. 

• Extra deduction for independent contractors: Self-employed people have more opportunities to save taxes because they are eligible for a greater deduction of 20% of their gross total income. 

• Voluntary contributions: To maximise their tax benefits, taxpayers are also able to make voluntary payments to NPS in addition to the required amount.

Tax Deduction under Section 80CCD(1B)

The Income Tax Department has added 80 CCD (1B), another subsection. This means that the taxpayer may freely give an additional ₹50,000. Tax deductions are available to Indian residents and Non-Resident Indians (NRIs) under 60 and above 18 years of age, as per section 80 CCD (1B). As a result, the overall deduction of 80 CCD (1B) + 80 CCD (1) equals ₹1.5 lakhs plus ₹50,000.

Tax Deduction under Section 80CCD(2)

The deduction that employers can take for their contributions to an employee's NPS account is covered by Section 80CCD(2). This is applicable to self-employed and salaried individuals who hire workers and fund their NPS accounts. The particulars of Section 80CCD(2) are as follows:

• Employer contribution: Under Section 80CCD, employers who fund their workers' NPS accounts are eligible for a deduction (2). Up to 10% of the employee's base pay and dearness allowance may be deducted from their earnings. 

• No financial limit: In contrast to Section 80CCD(1), Section 80CCD(2) does not set a maximum amount for the deduction. The full employer contribution is deductible for employers. 

• Employee eligibility: To be eligible for the benefit under Section 80CCD, the employee does not have to make any contributions to their NPS account (2). Nonetheless, the employer's claimed deduction is included in the total ₹1.5 lakhs that can be taken off under Section 80CCE.

A Snapshot of Deductions

Conclusion 

For those wishing to maximise their tax planning through the National Pension System, it is essential to comprehend the subtleties of Sections 80CCD(1) and 80CCD(2). Section 80CCD(2) emphasises the employer's involvement in assisting employees in obtaining tax benefits, whereas Section 80CCD(1) concentrates on individual payments to their NPS account. Through the use of these measures, taxpayers can contribute to the NPS and save money on taxes while also securing their financial future. To ensure correct compliance with tax regulations and to make well-informed judgements based on unique financial conditions, it is advisable to speak with a tax specialist.

FAQ

Q1. What is the difference between Section 80CCD(1) and Section 80CCD(2)?

For investments put into an Atal Pension Yojana or NPS account, salaried and self-employed individuals are eligible for tax deductions under Section 80 CCD(1). Under Section 80 CCD(2), salaried workers are eligible to deduct their employer's payments to their NPS and Atal Pension Yojana funds from their taxes. 

Q2. What is the difference between Section 80CCD(1) and Section 80CCD(1B)?

Section 80 CCD(1) allows salaried workers, independent contractors, and non-resident Indians (NRIs) to receive tax benefits for the money contributed to their Atal Pension Yojana or NPS accounts. Salaried, self-employed, and NRI people may deduct their taxes for contributions to government pension plans under Section 80CCD(1B). The tax benefit exceeds the Rs. 1.5 lakhs Section 80CCD ceiling by up to Rs. 50,000.

Q3. Who can claim Section 80CCD(2) deduction?

Only those with salaries are covered by Section 80CCD(2); self-employed people are not. One may take use of the deductions under this provision in addition to those under provision 80CCD(1).

Q4. Can I claim deduction under Section 80CCD(1) and 80CCD(2) at the same time?

Yes, qualifying persons may read Sections 80CCD(1) and 80CCD(2) jointly to claim tax benefits up to Rs. 1.5 lakhs.

Q5. Is Section 80CCD(2) part of the new tax regime?

FM Sitharaman proposed five significant changes in Budget 2023 to entice taxpayers to embrace the new system. Note that under the new tax regime, salaried individuals can deduct two expenses: Standard Deduction and Section 80CCD(2) Deduction for Employer's NPS Contribution.

Q6. What is the lock period of 80CCD(2)?

People from the unorganised sectors who are between the ages of 18 and 40 can also receive tax deductions under Section 80CCD through the Pradhan Mantri Pension Yojana or Atal Pension Yojana. The following are some of this scheme's main highlights: The subscriber is locked in for as long as they are 60 years old.

Q7. Can I directly invest in 80CCD 1B?

Subsequent to subsection 80CCD(1B), only NPS subscribers are eligible for an additional deduction for investments up to Rs. 50,000 made in an NPS (Tier I account). This is on top of the Rs. 1.5 lakh deduction permitted by Section 80C of the Income Tax Act of 1961.

Q8. What is the maximum contribution for 80CCD(2)?

For those who work for the government, it is required; for others, it is optional. The maximum amount that can be claimed under section 80CCD(2) is ₹2 lakhs. It includes the extra fifty thousand rupees that can be deducted under 80CCD(1B).

Q9. What is the new rule for NPS withdrawal?

A subscriber must have had an account for three or more years in order to be eligible for a partial withdrawal from NPS. NPS partial withdrawal restrictions limit the amount that subscribers can withdraw to 25% of their own payments. Under PFRDA rules, users are permitted to take up to three partial withdrawals in the course of their NPS account.

Q10. What is the maximum deduction limit under Section 80CCD(1) for contributions to the NPS?

Under Section 80CCD(1), individuals can claim a maximum deduction of ₹1.5 lakh for contributions to the NPS. This limit is part of the overall ₹1.5 lakh limit under Section 80C.

Q11. How does Section 80CCD(2) benefit employees with NPS contributions from their employers?

Section 80CCD(2) allows employees to claim an additional deduction for employer contributions to the NPS, which is over and above the ₹1.5 lakh limit under Section 80C. The maximum deduction allowed is up to 10% of the salary (basic + DA).

Q12. Can a taxpayer claim deductions under both Section 80CCD(1) and Section 80CCD(2) in the same financial year?

Yes, a taxpayer can claim deductions under both Section 80CCD(1) and Section 80CCD(2) in the same financial year. Section 80CCD(1) is for individual contributions, while Section 80CCD(2) is for employer contributions.

Q13. What types of contributions are eligible for deduction under Section 80CCD(1)?

Contributions made by individuals to the NPS are eligible for deduction under Section 80CCD(1). This includes both employee and self-employed contributions.

Q14. Are contributions to the NPS made by self-employed individuals eligible for deductions under Section 80CCD(1)?

Yes, self-employed individuals can claim deductions under Section 80CCD(1) for their contributions to the NPS, up to the maximum limit of ₹1.5 lakh.

Q15. What is the impact of the new tax regime on deductions under Section 80CCD(1) and 80CCD(2)?

Under the new tax regime, individuals opting for lower tax rates are not eligible to claim deductions under Section 80CCD(1) and 80CCD(2). The old tax regime, which includes these deductions, allows taxpayers to benefit from these provisions.

Q16. Is there a limit on the amount of deduction that can be claimed under Section 80CCD(2) for employer contributions?

Section 80CCD(2) allows deductions for employer contributions up to 10% of the employee’s salary (basic + DA). There is no maximum cap on this deduction, unlike the ₹1.5 lakh limit under Section 80CCD(1).

Q17. Can a taxpayer claim both Section 80CCD(1) and Section 80CCD(2) deductions if they have multiple NPS accounts?

Yes, taxpayers can claim deductions under both Section 80CCD(1) and Section 80CCD(2) for multiple NPS accounts. The total amount deducted under 80CCD(1) should not exceed ₹1.5 lakh, while employer contributions under 80CCD(2) are based on salary limits.

Q18. What documentation is required to claim deductions under Section 80CCD(1) and Section 80CCD(2)?

To claim deductions under Section 80CCD(1) and Section 80CCD(2), taxpayers need to provide proof of contributions to the NPS, such as the NPS passbook, account statements, and employer contribution certificates. Ensure all documentation is accurate and up-to-date to avoid discrepancies.