Section 80CCD of Income Tax Act

Section 80CCD of the Income Tax Act offers tax deductions to individuals contributing to specified pension schemes such as NPS and APY. It encourages taxpayers to invest in retirement savings, ensuring financial security. The section comprises three subsections:

Also Read: How to Calculate Income Tax on Salary?

Section 80CCD (1)

This subsection covers contributions made by an individual (salaried or self-employed) towards NPS or APY. For salaried individuals, the maximum deduction allowed is 10% of their salary (basic + dearness allowance). For self-employed individuals, the limit is 20% of their gross total income.

The maximum deduction under this subsection is capped at ₹1,50,000, inclusive of Sections 80C, 80CCC and 80CCD(1).

Section 80CCD (1B)

As introduced in the 2015 Budget, this subsection provides an additional tax deduction of ₹50,000 for voluntary contributions made by individuals to NPS. This is over and above the ₹1,50,000 limit available under Section 80CCD(1), allowing taxpayers to claim higher deductions.

Section 80CCD (2)

This subsection focuses on employer contributions made towards an employee’s NPS account. The maximum deduction allowed is up to 10% of the employee’s salary (basic + dearness allowance). Notably, this deduction is not subject to the overall limit of ₹1,50,000 under Section 80C, providing additional tax-saving opportunities for salaried individuals.

Also Read: Section 80CCD 1B of Income Tax

With a comprehensive understanding of each section, it will be easy to know the difference between 80CCD(1) and 80CCD(2).

Deduction Under Section 80CCD(1) for NPS

Section 80CCD(1) pertains to an individual's contributions to the NPS. This provision allows for a deduction from the subscriber's gross total income for amounts deposited in the NPS, subject to certain limits. The maximum deduction one can claim under this section is 10% of the salary (for salaried individuals) or 20% of the gross total income (for self-employed individuals), with an overall ceiling of ₹1.5 lakh under Section 80CCE.

This deduction is available to all individuals, whether employed by the government, the private sector, or self-employed. It encourages individuals to voluntarily save for retirement by reducing their taxable income, thereby lowering their tax liability.

Deduction Under Section 80CCD(2) for NPS

Section 80CCD(2) offers additional tax benefits for contributions credited by an employer to an employee's NPS account or Atal Pension Yojana account. The deduction under this section is over and above the limit prescribed under Section 80CCD(1) and is not subject to the ₹1.5 lakh limit under Section 80CCE.

The deduction under Section 80CCD(2) is limited to 14% of the salary of Central Government employees and 10% for others, including employees of the private sector. There is an upper cap of ₹50,000 as a provided deduction under section 80CCD(1b) in terms of amount, while restricted to the percentage of salary. The total salary for this includes salary plus dearness allowance.

Note that with income tax section 80CCD(2), the overall limit of deduction under sections 80C, 80CCC and 80CCD(1) extends up to ₹2 lakhs.

Also Read: Section 80CCD(1) and 80CCD (2) - Tax Benefits Under NPS

• Both salaried and self-employed individuals are eligible to claim deductions under Section 80CCD.
• Contributions must be made to a recognised pension scheme like NPS or APY.
• Under income tax Section 80CCD(1), salaried individuals can claim up to 10% of their salary (basic + DA), and self-employed individuals can claim up to 20% of their gross income.
• Additional voluntary contributions can be claimed under Section 80CCD (1B) up to ₹50,000.
• Employer contributions to NPS are eligible under Section 80CCD (2), with a maximum limit of 10% of the employee’s salary.
• Deductions under Section 80CCD (2) are available exclusively to salaried individuals.

• Deductions apply only to contributions made to government-notified pension schemes like NPS or APY.
• The total limit for income tax deduction u/s 80C, 80CCC, and 80CCD(1) combined is ₹1,50,000.
• Section 80CCD(1B) offers an additional deduction of ₹50,000 beyond the ₹1,50,000 limit.
• Employer contributions under Section 80CCD(2) are exempt from the ₹1,50,000 cap.
• Withdrawals from NPS are taxable, except for exemptions on partial withdrawals or lump-sum amounts upon retirement.
• Contributions to Tier II NPS accounts are not eligible for tax deductions.
• Taxpayers must retain documentation, such as proof of contributions, to support claimed deductions.
• Non-compliance with eligibility criteria or conditions may lead to the rejection of deductions claimed under Section 80CCD.

• Section 80CCD provides tax benefits on contributions to NPS and APY to encourage retirement savings.
• It includes three subsections: 80CCD(1) for individual contributions, 80CCD(1B) for additional voluntary contributions, and 80CCD(2) for employer contributions.
• The combined deduction limit under Sections 80C, 80CCC, and 80CCD(1) is ₹1,50,000.
• Section 80CCD(1B) offers an additional deduction of ₹50,000, allowing taxpayers to claim up to ₹2,00,000 in total.
• Employer contributions under 80CCD(2) are over and above the ₹1,50,000 limit and capped at 10% of salary (basic + DA).
• Withdrawals from NPS are partially taxable, with exemptions for specific scenarios like retirement lump sums.
• Self-employed individuals can claim up to 20% of their gross total income under 80CCD(1).
• Contributions to Tier II NPS accounts do not qualify for deductions.
• Taxpayers should carefully document contributions to avoid issues during assessments.
• Combining Sections 80CCD(1), 80CCD(1B), and 80CCD(2) can maximise tax savings while building a secure retirement corpus.

Explanation with an Example

Imagine Raj, a 35-year-old salaried employee who earns ₹10,00,000 annually. He contributes ₹1,00,000 to his NPS account, and his employer adds ₹50,000. Here’s how Raj’s deductions work:

Under income tax section 80CCD(1), Raj claims ₹1,00,000 (within the ₹1,50,000 limit).

Additionally, he contributes ₹50,000 voluntarily, which qualifies under Section 80CCD(1B).

His employer’s ₹50,000 contribution is eligible under Section 80CCD(2), and there is no overlap in the ₹1,50,000 limit.

By leveraging these subsections, Raj saves on taxable income while securing his retirement.

• Investments in NPS and APY provide dual benefits: tax savings and retirement security.
• Flexibility to contribute as per individual financial capacity.
• Section 80CCD deductions apply to salaried and self-employed individuals.
• Employer contributions under Section 80CCD(2) boost retirement savings without affecting other deductions.
• Taxpayers can claim an additional ₹50,000 deduction under Section 80CCD(1B).
• Partial tax exemptions on NPS withdrawals ensure liquidity during retirement.
• Encourages disciplined, long-term financial planning.
• Aligns with the government’s objective of creating a pensioned society.

Also Read: NPS vs ELSS

• Opt for health insurance plans and claim deductions under Section 80D. For instance, premiums paid for the best health insurance policy covering spouses and children can reduce taxable income by up to ₹25,000, with an additional ₹25,000 for covering parents below 60 years of age.
• Invest in tax-saving fixed deposits or ELSS funds under Section 80C. For example, a 5-year tax-saving FD allows you to lock in your money while claiming deductions up to ₹1,50,000.
• Claim deductions on education loans under Section 80E. The interest paid on such loans can be deducted for up to 8 years, helping young professionals reduce their financial burden.
• Avail home loan interest deductions u/s 24(b), allowing a maximum deduction of ₹2,00,000 on the interest paid.

Investing in the National Pension Scheme (NPS) offers individuals an opportunity to secure their financial future while enjoying tax benefits under the Income Tax Act. By utilising tax deductions u/s 80CCD(1), Section 80CCD(1b) and 80CCD(2), investors can maximise their savings and ensure a financially secure retirement.

By leveraging the tax benefits of NPS and health insurance plans, individuals can build a robust financial portfolio. This will not only secure their retirement but also safeguard their health and well-being in the long run.

We at TATA AIG offer a dynamic range of medical insurance, including critical illness insurance. Additionally, we offer a variety of valuable add-ons, such as maternity cover or OPD cover, and 24/7 expert help. This makes it easy for an applicant to get instant treatment without immediate payment requirements.