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

The National Pension Scheme (NPS) is a government investment scheme in India introduced to offer systematic retirement planning options to citizens. It was launched in January 2004 for government employees, and subsequently, with time, it was opened to all sectors until 2009. It primarily takes care of one’s financial security and stability post-retirement.

NPS is managed by the Pension Fund Regulatory and Development Authority (PFRDA), which encourages people to invest in a pension account at regular intervals during their employment. In NPS, investors can withdraw a portion of the corpus in a lump sum and utilise the remaining amount to purchase an annuity to secure a steady income in their retirement years.

Investors in the NPS can make their investment choices based on their risk appetite. They can opt for different asset classes, such as government securities, corporate bonds, and equity market instruments. The scheme allows for active choice (selecting the asset allocation percentages) or auto choice (where the allocation adjusts with age).

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)

Section 80CCD(1) pertains to the contributions made by an individual 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)

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.

Flexibility

One of the critical features of the NPS is its flexibility across jobs and geographic locations. Regardless of a change in employment or city, the NPS account remains constant, ensuring that individuals can continue contributing to their retirement savings without any interruption.

Market-Linked Returns

The NPS is a market-linked retirement savings plan, which means that a portion of the funds can be invested in various asset classes, including equity, corporate bonds, and government securities. This exposure to the capital market has the potential to yield higher returns compared to traditional fixed-income retirement savings options, thus potentially leading to a larger retirement corpus.

Own Investment Choices

Subscribers to the NPS have the option to choose their investment mix or opt for an auto-choice option that automatically adjusts the asset allocation based on the age of the subscriber. This flexibility allows individuals to tailor their investment strategy according to their risk appetite and financial goals.

Low Cost

The NPS is known for its low-cost structure, making it one of the most cost-effective investment options available for retirement planning. The fund management charges are among the lowest, ensuring that a more significant portion of the investment goes towards building the retirement corpus.

Diversified Fund Options

The NPS offers a variety of fund options managed by professional fund managers from different pension fund companies. This variety allows subscribers to choose the fund manager with the best performance track record, aligning with their investment philosophy.

Regular Pension Income

Upon retirement, the NPS ensures a regular pension income through the purchase of an annuity with a portion of the corpus. This annuity provides financial stability and support in the post-retirement years, acting as a safety net for retirees.

Partial Withdrawal Benefits

The NPS allows for partial withdrawals under specific conditions, such as for the education of children, marriage, and the construction or purchase of a first home. This feature adds a layer of liquidity to the investment, making it more accessible in times of need.

Eligibility Check: Ensure you meet the eligibility criteria to invest in NPS. Generally, any Indian citizen between the ages of 18 to 60 can join.

Choose a Suitable Option: Decide whether you want to opt for an NPS Tier-I or Tier-II account. Tier-I is mandatory and primarily meant for retirement savings, while Tier-II is optional and offers more flexibility for withdrawals.

Select a Pension Fund Manager: NPS offers multiple Pension Fund Managers (PFMs) to choose from. Research and select the PFM that aligns with your investment goals and risk tolerance.

Submit Application: Approach a Point of Presence (POP) or register online through the NPS website. Fill out the application form and submit the required documents, including identity proof, address proof, and PAN card.

Contribute Funds: Decide on the initial contribution amount. You can choose between a lump sum or regular contributions through the Electronic Clearing Service (ECS), Standing Instruction (SI), or National Automated Clearing House (NACH).

Asset Allocation: Determine your preferred asset allocation based on your risk appetite and investment horizon. NPS offers various investment options, including Equity, Corporate Bonds, Government Bonds, and Alternative Assets.

Monitor and Review: Keep track of your NPS investments regularly. Review your portfolio periodically and make adjustments as necessary to stay aligned with your financial goals and market conditions.

Under Section 80D of the Income Tax Act, tax deduction allows individuals to claim tax benefits on premiums paid for a health insurance policy. This deduction applies to both individual and family medical insurance plans, providing relief on taxable income up to a specified limit, i.e. ₹25,000 for ordinary citizens and ₹50,000 for those above 60.

We at Tata AIG offer a dynamic range of health insurance, including critical illness insurance. With this you can get facility of cashless health insurance at hospitals all over India. This makes it easy for an applicant to get instant treatment without immediate payment requirements.

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 under Section 80CCD(1), Section 80CCD(1b) and 80CCD(2), investors can maximise their savings and ensure a financially secure retirement.

With this, by leveraging the tax benefits of NPS and health insurance policies, individuals can build a robust financial portfolio that not only secures their retirement but also safeguards their health and well-being in the long run.