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Income Tax Deductions under Sec 80 CCD (1B)

8 Mins 19 May 2023 0 COMMENT

Income tax filing can be tedious and stressful, depending on an individual’s total tax bill. Thankfully, there are ways to lower tax liabilities, such as investing and saving money, and many investment options help taxpayers save tax and inch closer to financial goals. The National Pension Scheme (NPS) is one of them. Let’s learn more about the NPS and its tax benefits.

What is the National Pension Scheme?

The National Pension Scheme (NPS) is a government-sponsored pension scheme for citizens of India. The scheme was launched in 2004 with the objective of providing retirement income to all Indian citizens, particularly those in the unorganised sector who are not covered by any formal pension scheme. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and can be used by investors between the ages of 18 and 65.

NPS subscribers can invest in a mix of equity, fixed-income, and government securities based on their risk appetite and investment preferences. It is possible to deduct up to Rs 1.5 lakh from your income tax. This limit includes section 80C as well, which includes other tax deductions like insurance premiums, interest on educational loans, etc.

National Pension Scheme 80CCD1B

Section 80CCD1B offers tax deductions to investors contributing to the NPS. It can be used by the following types of taxpayers:

  • Salaried/ employed individuals
  • Self-employed individuals
  • Non-Resident Indians (NRIs)

Before understanding the provisions of Section 80CCD1B, it is first vital to understand Section 80CCD1Section 80CCD1 offers the following tax deductions:

  • A tax deduction of up to 10% of the basic salary + the Dearness Allowance (DA) earned in the previous financial year by employees, subject to a total limit of Rs 1.5 lakh
  • A tax deduction of up to 20% of the gross income earned in the previous financial year by self-employed individuals, subject to a total limit of Rs 1.5 lakh

Taxpayers eligible for the above-mentioned tax deductions can then claim an additional deduction under Section 80CCD1B. Here’s how this works:

Employees and self-employed individuals can claim a tax deduction of up to Rs 50,000 under Section 80 CCD1B over and above the limit of Rs 1.5 lakh, bringing the total limit to Rs 2 lakh. 

Eligibility to claim tax deduction under Section 80CCD1B

There are some rules that taxpayers should understand before claiming a deduction under Section 80CCD1B.  

  • The NPS has two accounts—Tier 1 and Tier 2. NPS Tier 1 is the primary account that is mandatory for all individuals who want to enrol in the NPS scheme. NPS Tier 2 is a voluntary savings account that is optional for all subscribers. Unlike the NPS Tier 1 account, the funds in the Tier 2 account can be withdrawn at any time without any restrictions. However, it is important to note that the NPS Tier 2 account can only be opened by those who already have an active Tier 1 account. The additional deduction of Rs 50,000 under Section 80CCD1B is available only to NPS Tier 1 accounts. Contributions made to NPS Tier 2 accounts are not eligible for any deduction under Section 80CCD1B.
  • The additional tax exemption of Rs 50,000 is over and above the limit of Rs 1.5 lakh of Section 80 CCD1B and Section 80C. However, please note that the total deduction from these sections is Rs 2 lakh.

How to avail of tax benefits under Section 80CCD1B?

Taxpayers can avail of tax benefits when they file their Income Tax Return (ITR) for the concerned financial year. They may have to submit documents like:

  • PAN Card
  • Aadhaar Card
  • Bank account statements showing the contributions

Conclusion

NPS can be a secure and reliable source of retirement income for Indian citizens. It also has tax-saving potential, making it a popular choice across the country. However, as with any investment, it is advised to first understand the risks, returns, withdrawal rules, and growth potential before investing. One should check the latest tax rules when filing an ITR, as tax laws can change over time.

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