Section 80CCD of Income Tax Act and benefits of claiming deductions under this

What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961, provides tax deductions for contributions made to the NPS. This section is further divided into two sub-categories:

1. Section 80CCD(1): This subsection deals with deductions for contributions made by individuals, including both salaried and self-employed individuals.
2. Section 80CCD(2): This sub-section allows deductions for contributions made by employers on behalf of their employees.

• Understanding Section 80CCD(1)

Under Section 80CCD(1), individuals can claim a deduction for their contributions to the NPS. The maximum deduction allowed is 10% of the individual's salary for salaried employees in the previous year and 20% of their gross income for self-employed individuals in the previous year. However, this deduction is within the overall limit of Section 80C, which is capped at Rs. 1.5 lakh.

• Section 80CCD(2): Employer's Contribution

Section 80CCD(2) allows employees to claim a deduction for contributions made by their employer to the NPS. The maximum deduction allowed is 10% of the employee's salary. This deduction is not subject to the overall limit of Section 80C.

NPS under Section 80CCD:

The National Pension Scheme (NPS), introduced by the Central Government, aims to provide organized pension benefits to Indian citizens. It is available for Govt.employees, private sector and self-employed individuals, helping them build a retirement fund and receive monthly income for a comfortable post-retirement life. Contributions to the NPS are also eligible for tax benefits under Section 80CCD of the Income Tax Act.

NPS relation to Section 80CCD:

• Contributions to NPS can be made from age 18 to 70. It is mandatory for Central Government employees & voluntary for others.
• To claim income tax deductions under Section 80CCD for the NPS Tier 1 account, a minimum annual contribution of Rs 6,000 (Rs 500/month) is required.
• For the NPS Tier 2 account and its Section 80CCD benefits, the minimum annual contribution is Rs 3,000 (Rs 250/month).
• Investors can choose from various investment options such as Equity funds, Government bonds, Government securities, etc.
• Partial withdrawals (up to 25% of contributions) are allowed under specific conditions.
• Upon retirement, individuals can withdraw up to 60% of the corpus as a lump sum, with the remaining 40% mandated for annuity investment.
• NPS is considered one of the most cost-effective equity-linked investment options available.

Terms and conditions for deductions under Section 80CCD:

• Section 80CCD deductions are available to both salaried and self-employed individuals. It is mandatory for government employees and voluntary for others.
• The maximum deduction under Section 80CCD is Rs 2 lakhs, including the additional Rs 50,000 deduction available under Section 80CCD(1B).
• Tax benefits which are claimed under Section 80CCD cannot be reclaimed under Section 80C. The combined deduction under Section 80C and Section 80CCD cannot exceed Rs 2 lakhs.
• NPS monthly payments or surrendered account amounts are taxable according to applicable provisions.
• Amounts received from NPS and if reinvested in an annuity plan then it becomes fully exempted from tax
• Section 80CCD deductions are claimed during income tax filing at the end of the financial year that requires proof of payment.

Atal Pension Yojana(APY) under Section 80CCD

The Atal Pension Yojana (APY), also known as the Pradhan Mantri Pension Yojana, is a government retirement scheme that guarantees a minimum pension. It is available to individuals aged between 18-40 years, it requires a minimum 20-year investment period before payouts begin at age 60. Investors choose a monthly pension amount from Rs 1,000 to Rs 5,000.

APY's tax benefits under Section 80CCD:

• Contributions to APY are eligible for deductions under Section 80CCD(1), up to Rs 1.5 lakhs.
• Like the NPS, APY also qualifies for an additional deduction of up to Rs 50,000 under Section 80CCD(1B).
• In case of the investor's death, the spouse receives payments. Premature death before 60 years allows the spouse to withdraw the fund or continue the scheme.
• Self-employed individuals can deduct up to 20% of their annual income for APY investments, within the overall Section 80CCD limits.

Conclusion

Section 80CCD offers one of the best opportunities to save tax while simultaneously planning for your retirement. By investing in the NPS, you can not only reduce your current tax burden but also secure your financial future. So, if you're looking for a tax-saving investment option that will also provide you long-term benefits, then you should definitely consider investing in the NPS under Section 80CCD.