Deductions under Section 80CCD (1) and 80CCD (2) of Income Tax

Introduction:

The government of India offers several provisions for taxpayers to lower their tax liabilities through tax deductions and exemptions under the Income Tax Act 1961. Section 80CCD is one of the sections under the act that allows individuals to lower their taxable income by claiming deductions on contributions made to two central government-backed savings schemes. Learn more about Section 80CCD and the tax savings it allows in a financial year.

What is Section 80CCD of the Income Tax Act 1961?

Section 80CCD offers income tax deductions on contributions to the National Pension Scheme (NPS) and the Atal Pension Yojana (APY). The section covers NPS contributions made by employees and employers and is categorised into two sub-sections—Sections 80CCD (1) and 80CCD (2).

Understanding NPS tax benefit under Section 80CCD (1)

Section 80CCD (1) offers the following NPS tax benefits:

• Employees can claim a tax deduction of up to 10% of their basic salary plus the Dearness Allowance (DA) earned in the previous financial year. However, the overall limit must not exceed Rs 1.5 lakh under Section 80 CCE.

Employees can claim an additional tax deduction of up to Rs 50,000 under Section 80 CCD (1B)

• Other taxpayers, such as self-employed individuals, can claim a tax deduction of up to 20% of their gross income earned in the previous financial year. However, the overall limit must not exceed Rs 1.5 lakh under Section 80 CCE.

• Self-employed individuals can claim an additional tax deduction of up to Rs 50,000 under Section 80 CCD(1B) over and above the limit of Rs 1.5 lakh under Section 80 CCE.

Hence, the total exemption limit is Rs 2 lakh under this section. Section 80CCD (1) also applies to Non-Resident Indians (NRIs). However, only NRIs between the ages of 18 and 60 are eligible to claim NPS deductions under it.

Understanding NPS tax benefit Section 80CCD (2)

Section 80CCD (2) applies to salaried employees only as it is applicable when an employer contributes to the NPS of an employee. This means self-employed individuals are not covered under its ambit. The section offers the following NPS tax benefits:

• Employees can claim a maximum deduction of up to 14% of their basic salary plus DA contributed by the central or state government towards NPS
• Employees can claim a maximum deduction of up to 10% of their basic salary plus DA contributed by employers of other sectors towards NPS

Understanding APY tax benefits Section 80CCD (1) 

Section 80CCD (1) offers the following APY tax exemptions:

• Investors can claim a tax deduction of up to Rs 1.5 lakh on their contributions under Section 80CCD (1) in a financial year
• Taxpayers can claim an additional tax deduction up to Rs 50,000 under Section 80 CCD (1B) over and above the limit of Rs 1.5 lakh

Important things to note when claiming tax deductions under Section 80CCD

Here are some points to remember:

• The tax deduction limit of Rs 1.5 lakh offered under Section 80CCD is not over and above the limit of Rs 1.5 lakh under Section 80C. For instance, if an individual claims a tax deduction of Rs 1 lakh on their investments under Section 80C (life insurance, Public Provident Fund, Sukanya Samridhi Yojana (SSY), etc.), they will only be able to claim an additional Rs 50,000 under Section 80CCD, bringing the total to Rs 1.5 lakh

• Section 80CCD (2) applies to employer contributions only. Taxpayers cannot club employee contributions under this section

Conclusion

Section 80CCD can help taxpayers considerably lower their annual tax liabilities. However, it is important to know that tax laws are subject to change over time. Therefore, it is strongly advised to be up to date at all times and consult a tax professional if in doubt. In addition to this, also note that tax benefits are only a part of the advantages of investing in such schemes. The NPS and APY can help investors build savings and secure their financial future in several ways.