Section 80CCD in India
The Government imposes compulsory financial charge or levy on the income of the taxpayer which is a source of revenue for the Government to fund various public expenditures. This financial charge or levy is known as Tax. There are two types of taxes. The tax levied on corporate income or the income of a person is the Direct Tax and the tax levied on the price of goods and services is the Indirect Tax. Non-payment or evasion of tax is liable for punishment. It is the moral responsibility of each and every citizen to pay the taxes and pay it on time.
The Indian Government has made several provisions under the Income Tax Act 1961 which allows deduction when investments are made in specific schemes. One such provision is Section 80CCD.
Section 80C is a provision under the Income Tax Act 1961 which allows a maximum deduction up to 1.50 Lakhs for investments made in specific schemes. Section 80CCD allows a deduction for the investment made in NPS (National Pension Scheme).
What is 80CCD?
Section 80CCD under the Income Tax Act is the provision which allows deduction of contributions made to the NPS. NPS is a notified pension scheme introduced by the Central Government solely for the Central Government Employees (except armed forces) and became effective from the 1st of January 2004. This Scheme was later made available to all the citizens of India from the 1st of May 2009.
The contribution made to the National Pension Scheme by the employee as well as the employer are eligible for deduction under Section 80CCD of the Income Tax Act. The maximum deduction allowed under the Section is 1.50 Lakhs which is inclusive of the deductions allowed under Section 80C.
What is NPS?
The National Pension Scheme (NPS), a new pension scheme which was introduced by the Central Government for all the citizens of India with an intention to help the investors create a corpus for their post-retirement life by making a contribution to the Scheme while they are in employment. This scheme has come as a blessing in disguise to the individuals who are employed in the private sector as they are not eligible for any pension after retirement. Any Indian Citizen in the age group 18 to 60 years is eligible to invest in the pension scheme.
There are two types of NPS Accounts, i.e., Tier I Account and Tier II Account.
Tier I Account: Since this account is meant for building a corpus which can be utilised after retirement, the entire amount cannot be withdrawn on maturity. Only 60% of the amount can be withdrawn and 40% has to be compulsorily invested in an annuity plan in order to fetch a monthly pension.
Tier II Account: A Tier II Account can be opened only if you have a Tier I Account. The investment under Tier II is voluntary. This investment makes provision for short and medium-term requirements. There are no restrictions on withdrawal in this Account.
Highlights of the NPS
The National Pension Scheme (NPS) was introduced by the Central Government with an intention to facilitate the creation of a corpus for the post-retirement life. The features of this scheme are:
- All Indian Citizens in the age group 18 years to 60 years are eligible to invest in the scheme
- It is mandatory for a Central Government employee to invest in this scheme
- For other individuals who are not Central Government Employees the investment in this scheme is voluntary.
- A minimum contribution of 500 has to be made every month
- The investment in this scheme has to be made continuously until an individual attains the age of 60.
- You have the option to choose from various kinds of investments like instruments giving fixed income, equity funds, and Government Securities, but investment in an equity fund is restricted to 50%.
- The investment is market-linked and cost of managing the fund is nominal
- On turning 60, withdrawal to the extent of 60% of the corpus is allowed. 40% of the corpus needs to be compulsorily converted into an annuity plan.
- There is an option for deferred exit also, but 80% of the corpus has to be converted to annuity plan.
- 25% of the corpus is permitted to be withdrawn to fund specific expenses like medical expenses for self and family, education or marriage expenses of children, purchase of a house, and so on.
- Central Government Pension Scheme and the State Government Pension Scheme are the two main schemes of NPS. However, since the year 2009 employees of other organisations can also make a voluntary contribution to the pension scheme.
Categories within 80CCD: 80CCD (1), 80CCD (1B), 80CCD (2)
Prior to Union Budget 2015, the maximum deduction allowed for investment in NPS was 1 Lakh. In a bid to encourage citizens to invest in the pension scheme, in Budget 2015 the deduction level was enhanced to 1.50 Lakhs. Also, a sub-section 80CCD (1B) was added to allow a further deduction of 50,000 for the investment made by each and every individual taxpayer in the pension scheme. This deduction is in addition to the deduction of 1.50 Lakhs permitted under Section 80C of the Income Tax Act 1961.
Under Section 80CCD there are other sub-sections on the basis of which the taxpayer can make an investment in NPS. Details regarding the contribution that is, self-contribution or the contribution made by the employer has to be mentioned in the IT Returns. A transaction statement has to be produced as proof to claim the tax benefit.
Section 80CCD (1)
Individuals who are salaried (Government employee or employee of an organisation other than the Government Department) and non-salaried individuals who make an investment in NPS are eligible for tax deduction under Section 80CCD (1). Details of the available benefits under Section 80CCD (1) are as given below:
- The maximum limit for tax deduction under this Section is 1.50 Lakhs which is including the deductions allowed under Section 80C.
- The threshold limit for a deduction that the salaried individuals can claim under this Section is 10% of their yearly salary (Basic + DA).
- The non-salaried, i.e., the self-employed individuals can claim a deduction to the extent of 10% of the gross income for the particular year. However, this limit has been enhanced to 20% from the FY 2017-18 onwards.
The whole concept is explained below with an example for better understanding:
An employee of the central government is investing 80,000 in the pension scheme. His salary particulars are mentioned herewith:
- Salary (Basic): 1,00,000
- DA: 25,000
- Perquisites and other taxable allowances: 50,000
- Investments under Section 80C: 1,00,000
- A maximum deduction of 12,500, being 10% of Basic + DA can be claimed by him under 80CCD (1)
Section 80CCD (2)
The Corporate model of National Pension Scheme allows contributions to the pension fund by the employer also. The employer can make contributions towards NPS apart from the contributions made towards EPF and PPF. This contribution can be made in three ways:
- The contribution by the employer can be equal to the contribution made by the employee
- The contribution by the employer can be either higher or lower than the contribution made by the employee.
- The contribution to the fund can be made by the employer on behalf of the employee
Both employee and the employer are eligible for the benefit under Section 80CCD (2).
The employer can show this contribution as a business expense under the Profit and Loss Account and claim tax benefit. For such contributions made by the employer to NPS, the employee can claim tax benefit under Section 80CCD (2) of the Income Tax Act 1961.
The maximum amount eligible for deduction is the least of the three mentioned below:
- 10% of the taxpayer's annual salary (Basic + DA)
- Gross total income
- The employer's contribution to the pension scheme
The eligible deduction is in addition to the limit under Section 80C. This benefit can be availed only by salaried individuals and self-employed individuals are not eligible for this benefit.
Here's an example for better understanding:
- The annual salary of an individual is 12 Lakhs
- He makes an investment in NPS to the extent of 1,00,000
- Now after the deduction under 80CCD (1) the taxable income will be reduced to 11 Lakhs
- The employer makes a contribution to the extent of 50,000 (an employer can make a contribution either equal to, higher or lower than the contribution made by the employee).
- A deduction to the extent of 50,000 can be claimed under 80CCD (2)
- Now the taxable income will be 12 Lakhs minus 1.50 Lakhs = 10.50 Lakhs
All the deductions put together under 80C, 80CCD, and 80CCD (1) should not be more than 1.50 Lakhs.
Section 80CCD (1B)
Section 80CCD (1B) under the Income Tax Act 1961 was introduced mainly to encourage investments under the National Pension Scheme. Under this Section a benefit for an added tax benefit to the extent of 50,000 for the investment made by both salaried individuals and non-salaried individuals. The tax benefits available under the scheme are as given below:
- This Section was introduced as a part of the amendments in the Union Budget 2015
- Further tax benefit to the extent of 50,000 for the investment made towards the pension scheme is available under this Section.
- Both self-employed and salaried individuals are eligible for the tax benefit under this Section
- The additional deduction allowed is in addition to the deduction allowed under Section 80CCD (1).
This is advantageous to taxpayers who come under the higher tax slab. There is a benefit of tax saving of 15,000 for taxpayers who fall under the 30% slab and 10,000 for those who fall under the 20% slab for the investment of 50,000 made in NPS.
Supposing an individual has made investments up to 1,50,000 in other specific schemes which are included under Section 80C other than the contribution of 50,000 made towards NPS then the additional deduction for 50,000 can be claimed under Section 80CCD (1B) which is in addition to the deduction of 1.50 Lakhs claimed under Section 80C.
Eligibility for Claiming Tax Deduction under 80CCD
Eligibility for claiming Tax Deductions under 80CCD is as detailed below:
- A salaried individual can claim a deduction under 80CCD to the extent of 10% of the salary (Basic + DA) and a self-employed individual can claim a deduction up to the extent of 10% of the gross annual income. The maximum quantum of the claim under 80CCD (1) and 80CCD (2) is 1.50 Lakhs.
- As per Section 80CCD of the Income Tax Act, 1961 contribution made by a salaried individual as well as the self-employed individual towards NPS is eligible for a tax deduction. The employer's contribution to NPS on behalf of the employee is also eligible for deduction under the Section.
- Under Section 80CCD (1B) an additional deduction to the tune of 50,000 is allowed for any self-contribution made by the taxpayer towards NPS. With this, the total deduction allowed under Section 80CCD amounts to 2 Lakhs.
- While filing the Income Tax Returns you can claim these deductions
- Hindu Undivided Families (HUFs) are not eligible for deduction under Section 80CCD
- Both Resident and Non-Resident Indians are eligible for tax deduction under 80CCD for the contributions made towards NPS. However, the contributions made by the NRIs should comply with the regulatory requirements as specified by the RBI and FEMA. Overseas Citizens of India (OCI) and Person of Indian Origin (PIO) are not eligible to make contributions towards NPS.
- If tax deductions are claimed under 80CCD then the same cannot be claimed under 80C
Claiming Tax Deductions under 80CCD: Terms and Conditions
The following are the terms and conditions to claim tax deduction under 80CCD:
- A maximum deduction up to 10% of salary (Basic + DA) can be claimed for the investment in NPS by a Central Government Employee.
- While it is mandatory for Government Employees to make a contribution towards NPS, it is voluntary for the others.
- 10% of the salary (Basic + DA) is the maximum investment in NPS that an employee of any other organisation other than the Government Department can make. 10% of the gross annual income is the limit for investment in NPS fixed for non-salaried individuals at present. For the next assessment year this limit has been enhanced to 20%.
- An employee can claim a deduction for the employer's contribution to NPS which is limited to 10% basic salary (Basic + DA).
- An additional deduction under Section 80CCD (1B) to the extent of 50,000 for the self-contribution made towards NPS. This is apart from the deductions under 80CCD (1) and 80CCD (2).
- The maximum deduction eligible under Section 80C, 80CCD (1), 80CCD (2) and 80CCD (1B) is 2 Lakhs.
Tax Treatment under National Pension Scheme
The table given below provides brief information about the tax treatment under NPS:
|Section under the IT Act||Contributions Eligible for Deduction||Maximum Limit|
Section 80CCD (1)
Mandatory contributions made by the Central Government employees/ employees of other organisations
Section 80CCD (2)
Contribution made by the Employer/Central Government
10% of the salary (Basic + DA)
Section 80CCD (1B)
Tax Benefit of 80CCD to the Employee/Employer
The Tax benefit of 80CCD to the Employee/Employer is as given below:
- An individual employed with Government Departments can avail the tax benefit under 80CCD (1) to the extent of 10% of the salary (basic + DA) for the contributions made towards NPS. The employees of organisations other than the Government Department also can avail tax benefit under 80CCD (1) for the contributions made towards NPS to the extent of 10% of the salary (Basic + DA).
- The employee can claim deduction under Section 80CCD (2) for the contribution made by the employer to the extent of 10% of the salary (Basic + DA).
- The employer can show the contributions made towards NPS as business expenses under the Profit and Loss Account and claim tax benefit.
The Tax Disadvantage/Implication of Withdrawing NPS
Investment in NPS has various tax benefits. Despite the benefits, people are sceptical about investment in NPS for the various disadvantages posed in the investment.
- The main disadvantage is the tax treatment of the corpus. On maturity 60% of the corpus which is allowed to be withdrawn is taxable and only 40% of the corpus which has to be compulsorily converted to annuity plan is tax-free as compared to EPF and PPF which is 100% tax-free. The 40% of the corpus converted into an annuity plan is eventually taxed as the monthly pension is taxable. The taxpayer eventually pays tax not only on the invested amount but also on the gains made. This is because the monthly pension is a combination of the invested capital and the gains made.
- NPS is a long-term investment, but yet a person investing in NPS does not enjoy the tax benefits like an investor in equity and stock. The investments made in equity and stock tax need not be paid for long-term capital gains, but the tax has to be paid on the investments made in equity funds of NPS. Investors in debt schemes get the indexation benefit and enjoy the benefit of paying tax at lower rates after 3 years, but the investments made in NPS are not eligible for indexation.
- There is confusion in the tax treatment of NPS corpus since it is a mix of EEE and EET. A portion of the corpus when withdrawn is tax-free where the other portion which has to be compulsorily converted into an annuity plan which eventually gets taxed. So normally most individuals who opt for NPS make a limited investment of 50,000 to take advantage of the additional deduction of 50,000 under Section 80CCD (1B). This way it becomes a default saving for the individual only to a limit that is required.
Banks/Financial Institutions in India Offering the Pension Scheme
The following Banks/Financial Institutions in India are offering the Pension Scheme:
|Name of the Bank||Pension Scheme|
New Pension Scheme
Unit Trust of India
UTI Pension Fund
HDFC Pension Fund
Bank of Baroda
BOB Pension Fund
ICICI Pension Fund
LIC of India
LIC Pension Fund
Kotak Mahindra Bank
Kotak Pension Fund
State Bank of India
SBI Pension Fund
Frequently Asked Questions
What are the different sub-Sections under 80CCD?
The different sub-Sections under 80CCD are 80CCD (1), 80CCD (2), and 80CCD (1B).
What is the tax benefit available under Section 80CCD (1)?
The salaried individuals can claim a tax benefit up to 10% of the salary (Basic + DA) and the self-employed individuals can claim a tax benefit up to 10% of the gross annual income at present with a maximum limit of 1.50 Lakhs inclusive of the deductions allowed under 80C.
What is the amount of contribution that the employers allowed to make towards NPS on behalf of their employee?
The employers can make a contribution to NPS to the extent of 10% of the salary (Basic + DA). The contribution can be equal to the contribution of the employee, lower than the contribution of the employee or higher than the contribution of the employee.
What is the tax benefit available under 80CCD (2)?
The employee can claim tax benefit for the contribution made by the employer under 80CCD (2) up to 10% of the salary (Basic + DA).
What is the tax benefit available under 80CCD (1B)?
An additional tax benefit up to a maximum of 50,000 is available under 80CCD (1B) apart from the maximum limit of 1.50 lakhs under 80C, 80CCD (1) and 80CCD (2). An individual who has made investments under specific instruments under 80C up to the maximum limit of 1.50 Lakhs, can make an investment under NPS to claim an additional tax benefit of 50,000 under Section 80CCD (1B).