A Detailed Guide to Section 80CCD of the Income Tax Act

The provisions specified in 80CCD(1) refer to contribution is made by self towards pension schemes such as retirement plans of life insurance companies, central/state government pension scheme, National Pension System (NPS), Atal Pension Yojana (APY), etc. Additionally, Section 80CCD (1B) has the provision of allowing an additional annual tax benefit of up to Rs. 50,000 on self contributions made towards pension schemes like NPS and APY.

Section 80CCD(2) specifies the tax benefits for employer contribution made towards pensions schemes like central/state government pension, Government NPS and Corporate NPS. One needs to keep in mind that Section 80CCD tax benefits are only available under the old tax regime and cannot be available under the New Tax Regime Section 115BAC.

This deduction applies to salaried private and government sector employees making contributions towards central/state government pension schemes, NPS and APY. In the case of self-employed, NPS and APY contribution benefits are included u/s 80CCD (1). An individual contributor to the above schemes can claim tax benefits of up to ₹1.5 lakh as part of the overall Section 80C annual limit under current rules.

There are however a few conditions that may apply on the Section 80CCD (1) tax benefit limit, such as:

• Any private or government salaried employee cannot claim deductions of more than 10% of their salary u/s 80 CCD(1) even if the ₹1.5 lakh limit is not exceeded. Note that salary in this context means basic salary plus dearness allowance (if applicable).
• Self-employed individuals cannot claim more than 20% of their gross income as tax deduction under Section 80CCD(1) even if it does not exceed the overall ₹1.5 lakh limit.

The section came into being when Section 80CCD(1) was amended in 2015 to encourage more participation in pension schemes such as the National Pension System (NPS) and Atal Pension Yojana (APY). Section 80CCD(1B) allows an additional ₹50,000 to be claimed under tax benefits in the case of self contributions made into NPS and APY. This amount is over and above the ₹1.5 lakh tax saving limit under Section 80CCD(1) mentioned earlier.

Therefore, the total deductions that may be allowed under Section 80CCD(1) for self contribution made towards retirement plans is ₹2 lakh annually. It is, however, essential to note that duplicate claims under Section 80CCD(1) and Section 80CCD(1B) are not allowed.

One of the most significant advantages salaried employees have over self-employed taxpayers is that they can enjoy tax savings against the pension fund contribution made by their employers. Currently, tax benefits on employer contribution towards pension plans are allowed in the case of state/central government pension plans, Government NPS account subscribers and Corporate NPS account holders.

A few important things to note in this regard are:

• Tax deduction benefit for employer contribution to corporate NPS account under Section 80CCD (1) is allowed up to 10% of the annual salary (basic + DA).
• On the other hand, state and central government employees can claim up to 14% of their salary (basic+DA) for employer contribution made into notified schemes under Section 80CCD.

The Section 80 CCD (2) benefits are over and above the combined ₹2 lakh annual limit u/s 80 CCD(1) and 80CCD(1B) mentioned above.

Originally introduced to replace the state and central government pension plans, National Pension Scheme was originally available to only State and Central Government employees. However, currently, any individual within the age group of 18-70 years can subscribe to the National Pension System (NPS). This retirement scheme consists of different types of market-linked investments across 4 asset classes – Equity, Corporate Debt, Government Bonds and Alternative Investment Funds.

• NPS Tier 1 account provides the tax saving benefits of NPS on self-contribution up to Rs. 2 lakh annually to all subscribers under both Section 80CCD(1) and Section 80CCD(1B).
• The tax benefits of Section 80CCD(2) can however only be availed by individuals subscribing to either the Corporate NPS or Government NPS schemes that feature contributions made by the employer.

Atal Pension Yojana (APY) or Pradhan Mantri Pension Yojana offers individuals a minimum guaranteed retirement pension. The scheme aims to help workers from the unorganized sector. Like, NPS, the maturity amount is only payable at retirement i.e. after one attains the age of 60 years. As per current rules, APY offers a guaranteed pension of up to Rs. 5000.

Here are some things to remember for claiming tax benefits through APY under 80CCD:

• Contributions of up to ₹1.5 lakh under section 80CCD(1) are eligible for tax deductions.
• Self-employed individuals can also earn tax benefits up to ₹1.5 lakh under section 80CCD.
• Additional ₹50,000 can also be claimed under section 80CCD (1B).
• At the time of death of the scheme holder, the maturity benefit is transferred to the spouse or any other nominee. The nominee can also withdraw the corpus or continue the contributions as pre-decided.