Deductions Under Section 80CCD (1B) of Income Tax

As mentioned, Section 80CCD1B is one of the sub-sections under Section 80CCD of the Income Tax Act. It was introduced in the Union Budget of 2016 and came into effect from 1st April, 2016. It allows taxpayers to claim an additional deduction of up to ₹50,000 for the contributions made towards the National Pension Scheme (NPS).

The additional deduction of ₹50,000 is over and above the available deduction limit of ₹1.5 lakhs under Sections 80C and 80CCD (1). It means that the maximum deduction available under Sections 80CCD (1) and 80CCD (1B) combined is ₹2 lakhs.

Let’s understand Section 80CCD (1B) with the help of an example. Suppose an individual has invested ₹3 lakhs in a financial year in tax-saving instruments such as the Public Provident Fund (PPF), life insurance, Equity Linked Savings Scheme (ELSS), and the NPS. The maximum deduction he can claim from his taxable income under Section 80C is ₹1.5 lakhs. However, he can claim an additional deduction of up to ₹50,000 for contribution to NPS u/s 80CCD (1B), taking the total deduction to ₹2 lakhs.

The Section 80CCD 1B 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, because it is directly linked to market performance, there is no fixed amount of return. 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, including a deduction of ₹1.5 lakh under Section 80CCD (1) and an additional deduction of ₹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.

Also Read: NPS Vs ELSS: Which One Is Better For Saving Tax?

Deduction U/S 80CCD (1B) is available for taxpayers filing their Income Tax Returns (ITR) under the old tax regime. These deductions are not available under the new tax regime as per Section 115BAC. Additionally, it is mandatory to invest in the NPS or the APY scheme to avail of the deduction under Section 80CCD (1B). However, there are certain age limits for investing in these schemes:

• All Indian citizens, including resident as well as non-resident Indians, can invest in the NPS. However, if the NRI’s citizenship changes after investment in NPS, then the scheme will be terminated.
• The age of the individual must be between 18 and 70 years.
• For investing in APY, the age of the individual must be between 18 and 40 years.
• Both salaried and self-employed individuals can invest.
• Those below the age of 18 can open an NPS Vatsalya Account and still claim the deduction under Section 80CCD (1B).

Below are the documents required for claiming tax benefits under Section 80CCD (1B):

• 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, corporate and government-sector employees can withdraw from their NPS account once they reach the age of 60. Based on their contributions, they can withdraw 60% of the corpus, and the remaining 40% is invested in an annuity plan to provide regular income. The 60% withdrawable amount can be lump-sum and is tax-exempt, and the remaining 40% annuity is taxable in the year of receipt.

For example, suppose an individual has invested ₹10 lakhs in his NPS account until the age of retirement. Upon reaching the age of 60, he can withdraw 60% of the corpus, i.e., ₹6 lakhs as a lump sum and the remaining ₹4 lakhs will be invested in an annuity plan. However, if the total accumulated corpus is less than ₹5 lakhs, 100% withdrawal is allowed.

Additionally, if an individual makes a premature withdrawal, he can withdraw 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 claiming the deduction under Section 80CCD (1B):

• If an individual has claimed the full deduction of ₹1.5 lakh for investing in NPS under Section 80CCD (1), he won’t be able to claim 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.
• The 80CCD 1B deduction is available only for contributions made to NPS Tier 1 accounts. Any contributions to Tier 2 accounts are not eligible for tax deductions.
• 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.

Section 80CCD (1B) of the Income Tax Act allows taxpayers to claim tax deductions and create a steady income for retirement. By understanding Section 8CCD 1B’s terms and technicalities, people can now invest strategically.

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