Section 80CCD of the Income Tax Act, 1961, is a government introduced section to encourage people to save for their retirement. By contributing to these schemes, taxpayers can reduce their taxable income and secure their future.
This blog explains everything you need to know about Section 80CCD of Income Tax Act, the eligible pension schemes and how they work under the old and new tax regimes.
What is Section 80CCD?
Section 80CCD in Income Tax provides tax benefits to individuals who invest in government-approved pension schemes. Here are the key points:
- Applies to the old tax regime for salaried and self-employed individuals.
- The National Pension System (NPS) and the Atal Pension Yojana (APY) are eligible pension schemes.
Categorisation of Section 80CCD in income tax
The 80CCD Income Tax Act of 1961 has three subsections based on the contributor:
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Sub-section
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Who Can Claim?
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Maximum Deduction Allowed
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80CCD(1)
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Individuals (salaried & self-employed)
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10% of salary (salaried) or 20% of gross income (self-employed), subject to ₹1.5 lakh limit
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80CCD(1B)
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Individuals (additional contribution to NPS)
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₹50,000 over and above the limit
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80CCD(2)
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Employers contributing to NPS on behalf of employees
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10% of salary (private employees), 14% of salary (government employees)
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Deductions under 80CCD(1) and 80CCD(2)
Section 80CCD 1 deduction:
- Salaried individuals: 10% of salary (basic + DA) for and
- Self-employed individuals: 20% of the gross total income
- Deduction limit: ₹1.5 lakh per year.
Section 80CCD 2 deduction:
- Private-sector employees: claim up to 10% of their salary (basic + DA).
- Government employees: claim up to 14% of their salary (basic + DA).
- Deduction limit: None
Availability of 80CCD deductions under the new tax regime
Taxpayers must choose carefully between the old and new tax (Section 115BAC) regimes. The new tax regime introduced in 2020-21 offers lower tax rates, fewer deductions and exemptions. The new regime does not allow the Section 80CCD deduction. If you contribute to NPS, the old regime may be more beneficial, allowing deductions under Section 80CCD.
National Pension System u/s 80CCD
The National Pension System (NPS) is a government-backed retirement savings plan that helps individuals build a pension corpus. Key points:
- Available to all Indian citizens, including NRIs (Non-Resident Indians).
- Provides tax benefits under old tax regime Sections 80CCD(1), 80CCD(1B) and 80CCD(2).
Atal Pension Yojana (APY) u/s 80CCD
Atal Pension Yojana (APY) is a pension scheme designed for Indian workers in the unorganised sector. As of October 2022, APY is available only for non-taxpaying citizens of India. Its features include:
- For non-taxpaying individuals aged 18-40 years who are Indian citizens.
- Under the old tax regime, prior investor contributions are eligible for tax deductions under Section 80CCD with additional deductions of up to Rs. 50,000 under Section 80CCD(1B).
Tax benefits under Section 80CCD
The following applies to the old tax regime:
- Section 80CCD(1): Deduction up to ₹1.5 lakh.
- Section 80CCD(1B): Additional deduction of ₹50,000 for NPS contributions.
- Section 80CCD(2): Employer contributions to NPS are tax-free.
Terms and conditions for deductions under Section 80CCD
The section 80 CCD deduction limit is:
- The ₹1.5 lakh limit under the Section 80CCE includes deductions under 80C, 80CCC and 80CCD(1).
- The additional ₹50,000 80 CCD (1B) deduction is separate from this limit.
- Employer contributions under 80 CCD (2) are not subject to the ₹1.5 lakh limit.
Eligibility for claiming deductions under Section 80CCD
Here's a breakdown of who is eligible to avail of these deductions:
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Criteria
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Eligibility
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Salaried Employees
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Yes
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Self-Employed Individuals
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Yes
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NRIs
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Yes
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Employers
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Yes – for 80CCD(2)
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Things to keep in mind about 80CCD deduction
Here are a few things to keep in mind:
- NPS offers higher tax benefits than other retirement plans due to an additional ₹50,000 deduction under 80CCD(1B).
- Employer contributions are fully deductible under 80CCD(2).
- Deductions are not available under the new tax regime.
FAQs
- Can NRIs claim deductions under Section 80CCD?
NRIs can claim deductions under Section 80CCD if they contribute to NPS.
- Can I claim both Section 80C and Section 80CCD deductions?
The total deduction under 80C, 80CC and 80CCD 1 is ₹1.5 lakh. However, the ₹50,000 under 80 CCD 1B deduction is additional.
- Are employer contributions to NPS taxable?
No, employer contributions are tax-free up to the specified limits under Section 80 CCD 2.
Conclusion
By understanding Section 80CCD, taxpayers can maximise their savings and secure their future by investing in government-approved pension schemes.
While considering tax-saving options, individuals should also invest in a solid health insurance policy. Health insurance for family members and senior citizens ensures financial protection against medical emergencies and provides access to better treatment options.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It is not intended as a substitute for professional advice, diagnosis, or treatment. Please consult your general physician or another certified medical professional for any questions regarding a medical condition. Relying on any information provided in this blog is solely at your own risk, and ICICI Lombard is not responsible for any effects or consequences resulting from the use of the information shared.