What is Section 80CCD? Benefits of Section CCD - 80CCD, 80CCC and 80C

1. What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961 allows individuals to get tax deduction by investing in the National Pension System (NPS) and the Atal Pension Yojana (APY). The maximum tax deduction that an individual can claim u/s 80CCD is ₹2 lakh in a financial year.

Section 80CCD deductions are divided into two subsections: Section 80CCD(1) and Section 80CCD(2). This categorization is to distinguish pension fund contributions made by the taxpayer (self) and contributions made by employers on behalf of an employee. Currently, an individual can claim a deduction of up to ₹1.5 lakh under Section 80CCD(1) and an additional deduction of ₹50,000 under Section 80CCD(1B) in a financial year.

• Section 80CCD(1):

   

  Under this subsection of the Income Tax Act, contributions made by the government, private or self-employed individuals to National Pension System or Atal Pension Yojana are eligible for tax deductions of up to ₹ 1.50 lakh in a financial year.

• Section 80CCD(1B):

   

  This subsection permits an additional tax deduction of ₹ 50,000 over and above the contribution made under Section 80CCD(1).

• Section 80CCD(2):

   

  Under this subsection, contributions made by the employer towards an employee’s pension fund is eligible for deductions under Section 80CCD(2). The deduction is limited to 10% of the employee’s basic salary plus dearness allowance (DA).

2. Benefits of Section CCD - 80CCD, 80CCC and 80C

Section	Description	Maximum Deduction
80C	Tax-saving instruments and investments	Up to ₹ 1,50,000*
80CCC	Contributions to annuity and retirement plans
80CCD(1)	Employee contributions to NPS/ Atal Pension Yojana up to 10% of salary + dearness allowance
80CCD(2)	Employer contributions to NPS/Atal Pension Yojana	Up to 10% of Basic + + Dearness Allowance
80CCD(1B)	Self-contributions to NPS and Atal Pension Yojana above the Section 80CCD(1) limit	Up to ₹ 50,000*

*The limit of ₹1,50,000 deduction is inclusive of Section 80C, 80CCC and 80CCD(1) deductions. This means that a maximum of ₹ 1,50,000 can be claimed under all three sections combined. Section 80CCD(1B) deduction of up to₹ 50,000 is over and above this limit. Therefore, under Sections 80C, 80CCC, 80CCD(1) and 80CCD(1B), a maximum deduction of ₹ 2,00,000 can be claimed.

3. Types of Section 80CCD Deductions in Detail

As already outlined above, deductions under Section 80CCD of the Income Tax Act are sub-categorized into two: Section 80CCD(1) and Section 80CCD(2). with a further division into Section 80CCD(1B).

• Section 80CCD (1):

   

  Section 80CCD(1) of the Income Tax Act is a deduction applicable to employed and self-employed individuals who contribute to the National Pension System and Atal Pension Yojana. Under this section, any individual over the age of 18 who contributes to an NPS account or Atal Pension Yojana scheme can claim a deduction of up to ₹ 1,50,000 per annum. However, this is subject to the following conditions:
  A government or private sector employee cannot claim more than 10% of salary as NPS or APY contributions. Here, salary means basic salary plus dearness allowance.
  For self-employed individuals, the limit is 20% of their gross income.

• Section 80CCD(1B):

   

  In the Union Budget of 2015, the government introduced a new subsection to Section 80CCD as an amendment - Section 80CCD(1B). This was done to boost the investment in NPS and Atal Pension Yojana schemes. As per Section 80CCD(1B), individuals who are employees or self-employed can claim an additional deduction of ₹ 50,000 when they contribute to NPS or Atal Pension Yojana. This deduction is over and above the amount that can be claimed under Section 80CCD(1). However, when claiming this, make sure there is no duplication of claim, i.e. you do not claim the same contribution amounts under both sections.

• Section 80CCD(2):

   

  Salaried individuals may enjoy the additional benefit of their employer contributing to their pension schemes, such as NPS. Section 80CCD(2) of the Income Tax Act gives employed individuals the benefit of claiming income tax deductions for contributions made by their employer. It is subject to the following conditions:

  • Private sector employees can claim up to 10% of their salary (basic salary + dearness allowance) as a Section 80CCD(2) deduction
  • Government employees can claim up to 14%

4. National Pension System under 80CCD

Contributions to the National Pension System or NPS are eligible for tax deductions under Section 80CCD. NPS is a retirement instrument that was first brought into the market in 2004. Initially, it was meant for government employees, but in 2009, it was opened up for others.

Today, any public-sector, private-sector employee as well as self-employed individuals who are over 18 years of age can invest in NPS. NPS is a market-linked instrument managed by fund managers who invest money across four different asset classes. Investments in NPS are usually locked in until retirement or superannuation age of 60 years. Individuals can choose to invest further until 70 years of age.

Some important things to know about NPS are:

• NPS is a retirement benefit plan that is compulsory for central government employees, but optional for others.
• Many individuals choose to invest in NPS because of its tax benefit.
• NPS contributions are eligible for up to ₹ 2,00,000 tax deductions under Section 80CCD.
• NPS contributions can be made to two different accounts: Tier I and Tier II. When it comes to claiming NPS tax benefit, only contributions to Tier I accounts are eligible for NPS tax deductions for private sector employees. For government sector employees, both Tier I and Tier II contributions are eligible for NPS tax deductions.
• Upon maturity, up to 60% of the NPS corpus can be withdrawn, tax-free. The remaining 40% has to be used to purchase annuities. Even this amount is tax-free. Therefore, NPS tax benefit is exempt-exempt-exempt, meaning contributions, interest earned and maturity amounts are tax-free.

5. Atal Pension Yojana under 80CCD

Atal Pension Yojana (APY), also known as Pradhan Mantri Pension Yojana is another government-backed retirement scheme that provides investors with a minimum guaranteed pension on retirement.

This pension yojana is aimed primarily at people in the unorganized sector. Individuals between the age of 18 and 40 are eligible to apply for this pension scheme. Just like NPS, APY contributions are locked in until 60 years of age, with premature withdrawals permitted under special circumstances. Atal Pension Yojana benefits for tax are similar to that of NPS tax benefits:

• Under Section 80CCD(1), APY contributions of up to ₹ 1,50,000 are eligible for tax deductions.
• Self-employed individuals can claim deductions on APY investments of up to 20% of their annual income as long as it does not exceed ₹ 1,50,000.
• An additional investment of up to ₹ 50,000 in APY is also eligible for deduction under Section 80CCD (1B), just like for NPS.
• Depending upon the contributions made, subscribers can receive guaranteed pensions of ₹ 1,000, ₹ 2,000, ₹ 3,000, ₹ 4,000, or ₹ 5,000 per month after retirement. However, this pension income is taxable.
• In case of a subscriber’s death, their spouse will be entitled to receive the pension instead. If the subscriber dies prematurely, i.e. before they turn 60, the spouse can either exit the scheme by withdrawing the entire corpus or continue it in their name and receive the pension after retirement. Therefore, APY also provides the benefit of paying a lump sum to dependents in case of death.

6. Terms and Conditions For Deductions Under Section 80CCD

When claiming deductions under Section 80CCD, here are some things to keep in mind:

• Section 80CCD deductions are applicable to public-sector and private sector individuals as well as self-employed people.
• Section 80CCD deductions can be claimed for both NPS and Atal Pension Yojana contributions.
• The total deduction limit for Sections 80C + 80CCC + 80CCD(1) + Section 80CCD(1B) = ₹ 2,00,000.
• An additional deduction of ₹ 50,000 can be claimed under Section 80 CCD(1B) for self-contributions made to NPS or APY.
• Deductions that have been claimed under Section 80CCD(1) cannot be claimed again under Section 80CCD(1B) or Section 80C.
• The pension payments received from NPS/APY investments after retirement will be subject to income tax. However, the corpus on maturity and the amount used to purchase annuities will be completely tax-free.
• Deductions under Section 80CCD can be claimed while filing income tax returns. However, you may be required to produce proof for the same.

7. Eligibility for Claiming Deductions Under Section 80CCD

• The provisions of Section 80CCD are applicable to all Indian citizens who contribute to NPS or APY. Even NRIs can claim this deduction.
• Individuals must be over 18 years of age to claim Section 80CCD deductions.
• Additionally, only salaried individuals, whether in the government sector or private sector, and self-employed individuals are eligible to claim tax deductions under Section 80CCD. Hindu Undivided Families are not eligible.

When filing your income tax returns, as a salaried or self-employed individual, you can claim up to ₹ 1,50,000 jointly under Section 80CCD(1) for contributions made to NPS or APY individually and Section 80CCD(2) for contributions made by the employer. An additional ₹ 50,000 can be claimed for self-contributions made to NPS or APY under Section 80CCD(1B)

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Friday, August 12, 2022

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