Section 80CCD of Income Tax Act
National Pension Scheme and Atal Pension Yojana are ideal investment tools to secure your retirement financially. What makes these policies more profitable is that you can maximise tax savings against your investment in both schemes with an additional deduction of ₹50,000 and above under Section 80CCD of Income Tax Act.
However, there are several divisions and specifications in this Act, which can make it confusing for many.
Keep scrolling to understand the entire process better!
Categories in Section 80CCD of Income Tax Act
Once you know about "what is 80CCD", let's dive in to know about its 2 divisions:
What Is Section 80CCD (1) of Income Tax Act?
This subsection of the 80CCD Income Tax Act focuses on the tax deductions against the investment in NPS.
Now, note the following provisions of 80CCD (1):
- Maximum Deduction: Up to 10% of your total income(basic + dearness allowance)
- For Self-employed: The maximum deduction limit extended to 20% of his/her total income. The maximum deduction ceiling is ₹1,50,000 in the concerned financial year.
Note: Similar deduction limit applies to Atal Pension Yojana Scheme.
- Amendment to 80CCD 1(B)
According to the Government Budget 2015, 80CCD 1(B) has been added to the list. Here, whether you are self-employed or salaried, you can enjoy an additional tax deduction of ₹50,000. However, this increased the 80CCD deduction limit to ₹2,00,000.
What Is Section 80CCD(2) Under Income Tax Act?
This section primarily deals with the contributions made by an employer towards the NPS scheme besides the PPF and EPF. There is a maximum limit to the employer's contribution. It can be higher or lower than the employee's contribution. Here, only salaried individuals are eligible to enjoy tax deductions. You can avail of this deduction under this section over and above the Section 80CCD (1). As an employee, here's the maximum deduction you can claim:
- Up to 10% of the employee's total income (basic + dearness allowance) is equivalent to the employer's contributions.
- In the Central Government's employee, you enjoy a tax deduction of 14% on the total income.
80CCD Eligibility: Can You Claim the Tax Deduction?
As a taxpayer, make sure to meet the eligibility requirement to make contributions in NPS:
- Citizenship: Indian and NRI
- Age Limit: 18 to 65 years
- Employment Status: Any self-employed or salaried individuals (both private and government employee). You can even enjoy tax deductions on your employer's contributions.
- HUFs: Not Eligible
Note: Only an individual taxpayer can claim deduction under 80CCD.
Maximum Deduction Under Section 80CCD: How Much Will You Save?
Let's make it easier for you to understand with the help of an example:
Suppose your basic salary is worth ₹6,00,000. You earn another ₹3,00,000 as dearness allowance. Now the 80CCD calculation stands at:
Maximum Deduction under 80CCD
Maximum Deduction under 80CCD 1(B)
Maximum Deductions under 80CCD (2)
What Does a Financial Expert Say on 80CCD (2) Employee Tax Savings?
An employer provides the Form-16 to the employee. It contains all the details, including the total salary and the 80CCD (2) deduction limit. Any excess contribution to the employee's account will be taxable.
80CCD of Income Tax Act: Conditions You Need to Look for
Take a look at the following terms and conditions you need to consider:
- 80 CCD of Income Tax Act is mandatory for public sector employees. At the same time, it is voluntary for private-sector employees.
- If you receive accumulated corpus from the NPS, that amount is applicable for the regular taxation system as specified. It is also applicable for a suspended account.
- If the accumulated corpus is reinvested in the annuity plan, you can enjoy tax exemption. You can claim your income tax exemption under 80CCD at the end of the financial year. Submit relevant documents like Statement of Transaction to the Income Tax department while filing tax returns.
80CCD of Income Tax Act helps you to enjoy a substantial deduction on your taxable income. Since the taxation system is subject to amendments, research before diving straight into the process.