Knowing the different sections of the Income Tax Act to handle your money well and pay less in taxes is essential. One such section that plays a pivotal role in your tax planning strategy is Section 80CCD. This section offers deductions related to contributions to the National Pension System (NPS) and Atal Pension Yojana (APY).
What is Section 80CCD?
Section 80CCD of the Income Tax Act was introduced to promote retirement planning among individuals. You can enjoy tax deductions when you contribute to designated pension plans, primarily the National Pension System (NPS) and Atal Pension Yojana (APY). This section has two subparts: Section 80CCD(1) and Section 80CCD(2). Let’s examine these two subsections closely.
Section 80CCD(1): Deductions for Employee and Self-Employed Individuals
Salaried workers and self-employed people both fall under the scope of this subsection. Here’s what you need to know:
- For salaried individuals: The maximum available deduction is 10% of their salary (Basic + DA).
- For self-employed individuals: The maximum available deduction is 20% of their gross total income.
- The maximum combined deduction for Sections 80C, 80CCC, and 80CCD(1) is capped at Rs 1.5 lakh under 80CCE.
- Section 80CCD(1B) offers an additional deduction of Rs 50,000 in addition to the total limit of Rs 1.50 lakh.
Example of Section 80CCD(1)
There’s a person named Mr Ajay who works for the Gujarat government. He puts Rs 70,000 into an NPS.
Here’s what he earns and saves:
- Basic Salary (Including Dearness Allowance): Rs 3,00,000
- Other Allowances and Perks: Rs. 7,00,000
- Money invested in 80C: Rs. 80,000
Now, he can only get a tax deduction of Rs 30,000 under section 80CCD(1), i.e. lower of the following-
- a. Actual NPS Contribution: Rs 70,000
- b. 10% of basic salary and dearness allowance: Rs 30,000
- c. Maximum Available Deduction: Rs. 1,50,000
He can’t claim more than Rs 70,000 (Rs 1,50,000 – 80,000) under Section 80C and Section 80CCD(1).
Let’s say he saved Rs 1,30,000 under Section 80C. In that case, his deduction under Section 80CCD(1) will be limited to the unclaimed Section 80C amount, which is Rs 20,000.
Section 80CCD(2): Employer’s Contribution
This subsection deals with contributions made by your employer to your NPS account:
1. Employer’s Contribution: Employers can contribute to their employees’ NPS accounts, which qualify for deductions under Section 80CCD(2). Section 80CCD(2) provides the following deduction for salaried individuals:
- Central or State Government Employees can claim a deduction of up to 14% of their salary (Basic + DA).
- Other than Central or State Government Employees can claim a maximum deduction of 10% of their salary (Basic + DA).
2. Taxable Income Consideration: The employer’s contribution under Section 80CCD(2) is treated as part of the employee’s salary but is deductible for tax purposes. This means that the taxable income of the employee is reduced.
Example of Section 80CCD(2)
Mr Lokesh is a Maharastra government employee whose total contribution to the NPS account is Rs 70,000. He contributes 50% of it, i.e. Rs 35,000 and 50% by his employer.
His salary structure is as follows:
- Basic Salary (Including Dearness allowance) – Rs 3,00,000
- Other Allowances and Perquisites – Rs. 7,00,000
- Investments under section 80C – Rs. 80,000
Mr Lokesh can claim Rs 30,000 under section 80CCD(1), i.e. lower of the following-
- Actual NPS contribution – Rs 35,000
- 10% of Basic and Dearness Allowance – Rs 30,000
- Restricted to an unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000).
Additionally, he can seek a deduction for the contribution made by the employer to the NPS account. Employer’s contribution to NPS is Rs 35,000. The maximum deduction for the employer’s contribution is Rs 42,000 (14% of Basic and Dearness Allowance).
Hence, Mr Lokesh can claim an additional deduction of Rs 35,000 under Section 80CCD(2). There is no restriction on the amount for deduction of the employer’s contribution under Section 80CCD(2).
Important Points to Note
- Lock-in Period: Contributions made to the NPS have a lock-in period until retirement. Partial withdrawals are allowed under certain circumstances, but most of the corpus must be used for pension benefits.
- Tax Treatment of Withdrawals: Contributions are eligible for tax deductions, but remember that when you withdraw funds from the NPS account, they become taxable. When you receive a pension from your NPS account, it is taxable as per your income tax slab.
- APY Contributions: Deductions under this section also apply to contributions made to the Atal Pension Yojana (APY), a government pension scheme for the unorganised sector.
Final Words
This section helps people save money on taxes and prepare for a secure retirement. Using this section, you can bring down your taxable income, protect your retirement future, and benefit from pension schemes like NPS and APY. Yet, it’s crucial to thoroughly consider your financial objectives and seek advice from a tax expert or financial advisor to maximise these deductions and safeguard your financial future.