Section 80CCD 1B of Income Tax

Section 80CCD 1B of the Income Tax Act was introduced under the scope of Section 80CCD and was introduced on 1st April 2016. Section 80CCD 1B offers additional deductions of up to ₹50,000 for the contributions made towards the National Pension Scheme (NPS).

The additional 80CCD 1B deduction is in addition to the ₹1.5 lakhs of deduction available under Section 80CCD(1). It makes the total maximum deduction limit of up to ₹2 lakhs after combining benefits of Section 80CCD(1) and SectionCCD 1B.

Let us understand it with 80CCD 1B examples: Say an individual invests ₹1.5 lakh under Section 80C (tax-saving FD, PF, etc.) and contributes ₹70,000 towards NPS per year. Then, the individual can claim total deductions of ₹2 lakh.

The National Pension Scheme, or NPS, is a government-sponsored pension scheme for salaried and self-employed individuals. It offers double the benefits of saving taxes during professional years and providing a stable income source after retirement.

It is one of the most sought-after options for people wanting to create a corpus and regular monthly income post-retirement. The funds deposited in the NPS scheme are invested intelligently in various securities and financial instruments, including the equity market.

NPS is known as the most affordable investment option, as it provides equity exposure. However, being directly linked to market performance means there is no fixed amount of returns. However, over the period, the returns from NPS have been observed to be the highest in the market.

Tier-1 Account (Pension Account)

It is the account which has a fixed lock-in period until the account subscriber reaches the age of 60 years. Only partial withdrawal is allowed from the account with certain terms and conditions.

Contributions towards Tier-1 accounts are tax-deductible and qualify for 80CCD(1) and 80CCD 1B deduction. It means an individual can invest up to ₹2 lakh in an NPS Tier-1 account and can claim deductions for the whole amount. ₹1.5 lakh under Section 80CCD(1) and ₹50, 000 under Section 80CCD 1B.

Tier-2 Account (Additional Account)

Tier 2 is a voluntary savings account that allows subscribers to make withdrawals at their preference. Only contributions made by central government employees to this account are eligible for tax deduction.

Moreover, the individual must have a Tier-1 account to open a Tier-2 account. Now, the NPS contributions will fall under the EEE mode of taxation, whereas the contributed amount, generated income and maturity proceeds are all tax-exempt.

An individual taxpayer is eligible to claim an 80CCD 1B deduction under the old regime of income tax returns. However, there is an age constraint when opening an NPS account. These are the eligible individuals:

• Resident Indians between the ages of 18 and 70 years.

• Non-residential Indians (NRIs) between the ages of 18 and 70 years. However, if the NRI’s citizenship changes after investment in NPS, then the scheme will be terminated.

These are the documents required for claiming tax benefits under NPS:

• Bank transaction statement as proof of investment.

• PAN Card

• Aadhar Card

Receipt of the contribution made towards Tier-1 (available on your NPS account).

By default, a corpus will be ready until the individual reaches the age of 60 based on their contributions. 60% of the corpus can be withdrawn, and 40% of the annuity plan needs to remain in place. The 60% withdrawable amount can be lump-sum and is tax-exempted and the remaining 40% annuity is taxable in the year of receipt.

If the individual makes a premature withdrawal, they can take on 20% of the corpus, which is also taxable. The remaining 80% has to be put back into the annuity plan. Remember, both the withdrawal and receipt from the annuity plan are taxable.

Moreover, premature withdrawals for any or every kind of expenditure are not allowed; the Pension Fund Regulatory and Development Authority of India has made certain rules and regulations for the same. Premature withdrawals can only be made in case of any emergency, such as a medical emergency, marriage within the family and others.

These are some of the points that one should keep in mind while making the claims under the NPS 80CCD 1B section:

• Investment made of the full amount of ₹1.5 lakh in NPS deduction in income tax for claiming benefit under Section 80CCD (1). Then, the subscriber will not be eligible to avail any other tax benefits under Section 80C.

• The NPS benefit in Section 80CCD 1B is an additional and over-and-above tax benefit provided in Section 80CCD (1). The 80CCD 1B limit is ₹50,000.

• Section 80CCD (1) is a part of Section 80C and 80CCC’s upper limit. All these sections together contribute to the benefit of ₹1.5 lakh.

• Individuals must have documentation for transactions related to NPS contributions to claim the tax deductions.

• In the event of the assessee’s demise, if the nominee decides to close the NPS account, then the amount received by the nominee will be tax-exempt.

NPS 80CCD 1B is a great way for taxpayers to get tax exemptions and create a steady income for retirement. By understanding 8CCD 1B’s terms and technicalities, people can now invest strategically.

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