How do you claim an additional Rs 50,000 deduction in income tax?

Most of us who pay income tax are familiar with Section 80C of the Income Tax Act, under which you can claim deductions from taxable income up to ₹150,000 per annum, by making investments in certain instruments. But did you know that you can claim an additional ₹50,000 deduction under Section 80CCD(1B) of the Act?

This means that you will be able to reduce your taxable income by ₹200,000. So if your annual income is ₹1,000,000, you will be able to reduce your taxable income to ₹800,000. Not only will you be able to reduce your taxable income, you’ll end up in a lower tax slab and pay lower income tax rates as well.

Investment options

So what are the investments that allow you to claim this additional ₹50,000 tax reduction? These are Tier I of the National Pension System (NPS) and the Atal Pension Yojana. By investing in these, you can save a substantial amount in terms of tax while simultaneously ensuring an income after your retirement.

Both the Atal Pension Yojana (APY) and NPS are guaranteed pension schemes administered by the Pension Fund Regulatory and Development Authority (PFRDA). APY and NPS qualify for deductions under Section 80C, but the total amount of deductions under Sections 80C, 80CCC and 80CCD(1) cannot be over ₹150,000. In order to encourage investments in pension schemes, the government introduced Section 80CCD(1B), which allows an additional benefit of ₹50,000 to those investing in the APY or NPS.  That said; the combined tax deductions available for both APY and NPS cannot exceed ₹200,000.

What is NPS?

NPS is a government-run scheme aimed at salaried and self-employed individuals. It has two Tiers i.e. Tier I and Tier II.  Contributions to Tier I are eligible for tax deduction. On the other hand, Tier II is an optional account and investors have to pay taxes on returns gained from Tier II investments.

Subscribers pay into these schemes to get a pension after retirement. The funds in NPS are invested by PFRDA-approved fund managers in a mix of instruments like equity, corporate debentures, government bonds and so on. Subscribers can choose their own mix of investments from the available asset classes. They also have the option of taking the automatic route, where the amounts are invested in a mix of instruments depending on the age of the investor.

Subscribers to NPS make contributions until retirement. While subscribers to Tier II can withdraw their funds at any time, conditions for Tier I subscribers are more stringent. Tier I subscribers can withdraw only 60 per cent of their corpus; the rest has to be put in a PFRDA-approved annuity plan (pension). That said; the entire 60% withdrawable amount is exempt from taxes.

In case of death, the nominee gets the entire corpus.

What is APY?

APY is aimed mainly at the unorganised sector, and gives subscribers a guaranteed minimum pension ranging from ₹1,000 to ₹5,000 per month, depending on the sum invested.

The minimum pension is guaranteed by the government. So, even if the sum invested does not fetch the returns expected, the government funds the shortfall. Monthly contributions as low as ₹42 can be made through the auto-debit facility of the subscriber’s savings bank/post office account.

The earlier you join the APY scheme; the lower is the monthly/quarterly/half yearly contribution you have to make to get a fixed monthly pension. For example, subscribers joining at 18 years of age have to contribute ₹42 and ₹210 on a monthly basis to get a minimum guaranteed monthly pension of ₹1,000 and ₹5,000, respectively. Similarly, subscribers joining at 30 years of age have to contribute ₹116 and ₹577 on a monthly basis to get a minimum guaranteed monthly pension of ₹1,000 and ₹5,000, respectively.

Things to remember

• A subscriber can open only one APY account. Multiple accounts are not permitted.
• In case of death of the subscriber, the spouse will receive the pension and on the death of both (subscriber and spouse), the pension corpus will be returned to the nominee.
• The government has amended the rules governing the APY to give an option to the spouse to continue to contribute for the balance period on the premature death of the subscriber.

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Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.