Table of Contents
| Section | Deduction relates to | New tax regime | Old tax regime |
| 80CCD (1) | Taxpayer’s contribution to NPS | Not available | Available |
| 80CCD (2) | Employer’s contribution to NPS | Available | Available |
Several clauses the Income Tax Department has added help to reduce personal tax obligations. These clauses inspire people to make different kinds of financial investments. Section 80C, which enables taxpayers to record their expenditures, savings, and investments for tax returns, is among the well-known tax breaks. Not only will planning for retirement help to secure your future, but it will also help to lower your tax load.
Section 80CCD: Deductions for Contributions to Pension Schemes
Overview:
Section 80 CCD outlines the tax benefits associated with contributions to pension fund schemes recognised by the central and state governments.
Section 80CCD of the Income Tax Act comprises several sub-sections. In addition to the aforementioned sections, several others address the treatment of funds, the tax implications of early withdrawals, and various rules and regulations concerning deposits in pension fund accounts.
The 80 CCD deduction extends beyond part 1 for employees. An additional benefit is provided under section 80CCD(1B).
The sections pertaining to income tax deductions apply to investments in pension schemes recognised by the central government. Section 80CCD (1) pertains to the investment or contribution made by an employer to a pension scheme, while section 80CCD (2) addresses the employer’s contribution to an employee’s pension account.
The National Pension Scheme (NPS) is a program established by the central government. Section 80CCD addresses tax deductions and reliefs associated with contributions to pension fund accounts.
Section 80CCD has been further divided into two subsections.
- 80CCD(1): Contributions made by the employee/self (salaried or self-employed) to NPS.
- 80CCD(2): Contributions made by the employer towards NPS.
This section is divided into three parts:
| Section 80CCD(1): | |
| Applicability | This subsection applies to individual contributions made by salaried or self-employed individuals. |
| Deduction Limits | For salaried employees: The maximum deduction is 10% of their salary (basic + dearness allowance).For self-employed individuals: The maximum deduction is 20% of their gross total income.The overall limit for deductions under this section is ₹1.5 lakhs per financial year. |
| Eligibility | All Indian citizens, including NRIs, between the ages of 18 to 70 years can claim this deduction. |
| Section 80CCD(1B): | |
| Additional Deduction | This subsection provides an additional deduction of up to ₹50,000 for contributions made to NPS, over and above the ₹1.5 lakh limit under Section 80CCD(1). |
| Total Maximum Deduction | Combining Section 80CCD(1) and Section 80CCD(1B), the total maximum deduction available is ₹2 lakhs (₹1.5 lakhs + ₹50,000). |
| Applicability | This additional deduction is available only if the taxpayer opts for the old tax regime. |
| Section 80CCD(2): | |
| Employer Contributions | This subsection applies to contributions made by the employer to the NPS. |
| Deduction Limits | For government employees: The deduction limit is 14% of their salary (basic + dearness allowance).For other employees: The deduction limit is 10% of their salary. |
| Availability | This deduction is available under both the old and new tax regimes. |
Key Points
- Encouragement for Retirement Savings: Contributions to NPS are eligible for tax deductions, encouraging individuals to save for retirement.
- Investment Options: NPS offers a mix of equity and debt investments, providing potential for higher returns over time.
- New Tax Regime: Under the new tax regime, only limited deductions are available, but Section 80CCD(2) remains applicable.
Example: If an individual invests ₹1.5 lakhs under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B), they can claim a total deduction of ₹2 lakhs. For salaried employees, if their employer contributes to NPS, they can claim an additional deduction under Section 80CCD(2).
Tax Benefits under NPS—by NPS Trust
Why do you want NPS?
NPS provides a diversified retirement investment with benefits in both tax savings and market-linked growth.
Though NPS is not a guaranteed product, it offers balanced exposure to debt and equities that, over a long investment horizon, might result in decent returns.
NPS offers some of the lowest fund management fees, therefore guaranteeing optimal contribution increase.
At maturity, some of the NPS corpus must be compulsively put in an annuity to give a monthly regular income in post-retirement life. NPS then fits really nicely with the objectives of retirement planning.
There is no guarantee on investment return. Under the present policies of Pension Fund Regulatory & Development Authority (PFRDA, the regulator for NPS), three Pension Fund Managers (PFMs) namely LIC Pension Fund Limited, SBI Pension Funds Private Limited and UTI Retirement Solutions Limited invest contributions towards pension in case of government employees.
Under NPS, the returns are entirely market based—that is, depending on the NAV of the pension fund schemes. The rewards will totally dependent on the contribution made and the investment increase till NPS is closed.
Conclusion
Knowing the variations between 80CCD(1) and 80CCD(2) will allow you to maximise your tax-saving plan. Section 80CCD(1) addresses self-contribution; Section 80CCD(2) addresses employer payments not bracketed within the limit under 80CCE, therefore obtaining a particular advantage in the case of salaried persons. NPS is a great way for tax savings and retirement planning with the extra advantages under 80CCD(1B).
To help lower their tax load, the Indian government grants tax deductions under Section 80CCD (1) and 80CCD (2) to every individual under NPS. These tax advantages also inspire people to save money for their life after retiring.