Section 80CCD : Deduction for Contribution to Pension Fund

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Hiral Vakil

Chapter VI-A
NPS
Pension Income
Section 80CCD
Last updated on March 3rd, 2023

Saving for retirement years is an essential part of financial planning for any individual and the income tax act provides several provisions to encourage taxpayers to save for retirement. One such provision is Section 80CCD of income tax act. Any individual who contributes towards the NPS – National Pension Scheme or Atal Pension Yojna (APS) can claim a Section 80CCD deduction.

What is Section 80CCD?

Section 80CCD deduction of income tax act allows individuals (between the age of 18-60 years) to avail of tax deduction against any contribution made towards the Pension Scheme of the Central Government, National Pension Scheme (NPS), or Atal Pension Yojna (APY).

Deduction under section 80CCD of Income Tax Act can not be claimed against short term capital gains u/s 111A , long term capital gains and income chargeable to tax at special rates..
Tip
Deduction under section 80CCD of Income Tax Act can not be claimed against short term capital gains u/s 111A , long term capital gains and income chargeable to tax at special rates..

There are three parts of section 80CCD that allow tax deduction subject to different conditions and limitations.

80CCD

Note: If the taxpayer opts for the new tax regime, the taxpayer cannot claim 80CCD (1) and (1B) deductions.

Section 80CCD (1)

Section 80CCD (1) allows tax deductions to all individuals. Hence, whether the contribution is made by a salaried individual or a self-employed individual is irrelevant.

Below are the deduction limit u/s 80CCD (1):

CategoryMaximum Deduction Limit
In case of a Salaried Individual10% of the Salary (Basic + DA) up to INR 1.5 lakh
In case of Self Employed Individual20% of Gross Total Income up to INR 1.5 lakh
Both Section 80C, 80CCC, and 80CCD (1) are covered under section 80CCE. The total deduction amount eligible for deduction u/s 80CCE is INR 1,50,000 in a financial year.
Tip
Both Section 80C, 80CCC, and 80CCD (1) are covered under section 80CCE. The total deduction amount eligible for deduction u/s 80CCE is INR 1,50,000 in a financial year.

Section 80CCD (2)

Employers can contribute to an employee’s NPS account. The contribution can be equal to or more than the contribution of the employee. Section 80CCD (2) is eligible in case of salaried individuals. Further, 80CCD (2) can be availed in addition to 80CCD (1).

Below are the deduction limit u/s 80CCD (2):

CategoryMaximum Deduction Limit
In case of a Salaried Individual10% of the Salary for Other Employees and 14% of the Salary for Central Government Employees
In case of Self Employed IndividualNA

Section 80CCD (1B)

Section 80CCD (1B) was introduced in the Union Budget 2015. As per the amendment, any individual (whether he has claimed deduction under section 80CCD(1) (2) or not) who deposits into New Pension Scheme Account, will be allowed a deduction subject to the maximum limit of INR 50,000.

Note: This deduction of INR 50,000 is independent of the threshold limit of INR 1.5 Lakh [for section 80C + Section 80CCC + Section 80CCD(1)]

Examples

Let us take examples to understand the calculation of the deduction limits better:

Example 1: Ajay is a salaried individual and makes an NPS contribution of INR 30,000.

His salary structure is as below:

Basic SalaryINR 3,50,000
Dearness AllowanceINR 1,50,000
Investments under Section 80CINR 80,000 (Hence, Section 80C available limit is INR 1,50,000 – INR 80,000 = INR 70,000)

Eligible Deduction will be lower of the following:

(i) NPS contribution i.e., INR 30,000

(ii) 10% of Basic Salary + DA i.e., INR 50,000

Hence, Ajay can claim INR 30,000 u/s 80CCD (1) per financial year.

Assuming that the investments made under Section 80C in the aforementioned example totals up to INR 1,30,000, the deduction will be limited to the unused amount of INR 20,000.

Example 2: Mr. Harshil is a Central Government employee contributing INR 40,000 under the NPS scheme. Further, his employer contributes the same amount i.e., INR 40,000 to the scheme.

His salary structure is as below:

Basic SalaryINR 4,50,000
Dearness AllowanceINR 1,50,000
Investments under Section 80CINR 70,000 (Hence, Section 80C available limit is INR 1,50,000 – INR 70,000 = INR 80,000 )

Eligible Deduction will be lower of the following:

(i) NPS contribution i.e., INR 40,000

(ii) 10% of Basic Salary + DA i.e., INR 60,000

Hence, Harshil can claim INR 40,000 u/s 80CCD (1) per financial year.

Apart from this, Mr. Harshil can also deduct the employer’s contribution u/s 80CCD (2). The eligible deduction here will be lower of the following:

(i) NPS contribution i.e., INR 40,000

(ii) 14% of Basic Salary (in case of government employee) + DA i.e., INR 84,000

Hence, Harshil can claim the whole of INR 40,000 u/s 80CCD (2)

ITR Form Applicable

The taxpayer can claim the deductions while filing ITR if all the above-mentioned conditions are fulfilled. Individuals can claim this deduction in any of the ITR forms, i.e, ITR 1ITR 2ITR 3, and ITR 4 depending upon their income sources.

Supporting Documents

Taxpayers can present the following documents apart from the common documents such as Form 16:

FAQs

Is Section 80CCD included in Section 80C?

No, Section 80CCD is not included in Section 80C. The latter tax deduction can be claimed for investments such as PPF, ELSS, ULIP, etc. while the former tax deduction can be specifically claimed for NPS and APY.

What is Section 80CCD (1B)?

Section 80CCD (1B) allows an additional tax deduction of INR 50,000 for contributions made by individual taxpayers towards NPS. This tax deduction is over and above the deduction of INR 1.5lakh available under 80CCD (1) & (2).

Are all the persons eligible for tax deduction u/s 80CCD?

Only Individual taxpayers qualify for tax benefits u/s 80CCD. Hence, any other person (HUF, Firm, Company) cannot claim this deduction.

Got Questions? Ask Away!

  1. Hi @Swaraj_Mangaonkar

    There are certain deductions that you can claim by Investing in NPS (National Pension System)

    1. The contribution to NPS is deductible up to Rs 1,50,000 under section 80CCD(1).
    2. Over and above you can further claim the additional benefit of Rs 50,000 under section 80CCD(1B).

    So, overall you can reduce your taxable income by Rs 2,00,000.
    And one can report deductions under section 80C while filing an ITR.

    Hope it helps.

  2. Hello @Jigar_Marvaniya

    The primary goal of NPS is to provide pension after retirement (saving plan).

    • An individual holding an NPS account have to make a minimum contribution of Rs. 1000 P.A in tier 1 account.
    • It matures when you turn 60.
    • You can withdraw up to 60% of the amount (corpus) tax-free, when you are invested till retirement.
    • The remaining money, ideally 40% of the total invested amount, should be used to buy an annuity plan, to get a lifelong pension.

    NPS accounts are of two types, tier I account and tier II account.
    The tax benefits are only applicable to tier-I accounts.

    There are multiple PFMs, Investment options (Auto or Active), and four Asset Classes i.e. Equity, Corporate debt, Government Bonds, and Alternative Investment Funds.

    Here is an article to know more about it and the process details.

    Hope we have addressed your query.

  3. @Muskan_Balar Can I invest only in Tier 2 NPS and not Tier 1 ? May I know the comparison between Tier 1 and Tier 2 account?

  4. Hi @akash_jhaveri

    You can open the NPS Tier II account only when you already have a Tier I account.

    • Tier 1 account is mandatory to open, while tier 2 is voluntary and can only open by members of tier 1.
    • In tier 1, withdrawal is restricted, whereas in tier 2 subscribers are free to withdraw at any time.
    • Only tier 1 account members are eligible for tax benefits.
    • Minimum contribution for account opening in tier 1 is Rs. 500 and in tier 2 is Rs. 1000.
    • Minimum NPS contribution in a financial year Rs. 500 towards tier 1 account and Rs. 250 towards tier 2 account.
    • Taxation on withdrawal for tier 1 - entire corpus is tax-exempt, at maturity. For tier 2 - One may withdraw the entire corpus, which is added to income and taxed according to the tax bracket they are in.

    Hope this helps.

  5. @Muskan_Balar I need to do tax planning with support for 2023-2024, I have a small investment in stocks. Any guidance you may extend. Not sure if we have platform to connect 1-1. Regards

  6. Hi @Sanjay_S

    Thanks for connecting on Quicko Tax QnA. Your queries seem to be more related to personalized tax planning.
    You can book a MEET where a dedicated tax expert can connect with you over a video call, understand your queries, and suggest you the best possible solutions.

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