These income tax deductions section is for investments made in a pension scheme notified by the central government. 80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme whereas section 80CCD (2) deals with employer contribution to an employee’s pension account.
National Pension Scheme (NPS) is the scheme notified by the central government. Section 80CCD of the income tax act deals with tax deductions and reliefs given for contributions made to the pension fund account.
Let’s understand both the sections individually.
As mentioned before, section 80CCD1 allows every tax-paying individual of India to get tax deduction benefits from the amount you deposit in your NPS 80CCD account. This tax benefit is open to both: employed and self-employed.
This section applies to all such individuals and is even open to NRIs aged between 18 to 60.
Your total taxable income can be deducted reducing your total tax liability to the government.
However, there is a limit to how much you can claim under section 80 CCD (1) like all other income tax deductions given by the government.
Section 80CCD 2 refers to a tax benefit for employers in respect to a contribution made to the pension scheme. If your employer contributes to your NPS account, your employer gets a tax benefit under section 80CCD 2.
This tax benefit is limited to 20% of the total income of the employer in the previous year.
Sections 80CCD1 and (2) fall under the larger section 80CCD of the income tax act, 1961. These sections were introduced in 2004 after the National Pension Scheme (NPS) was introduced for the first time in the country.
The entire Section 80 CCD deals with tax benefits provided on the basis of contributions made to the pension fund schemes notified by the central government. There are various sub-sections to Section 80CCD.
Apart from the sections mentioned above, there are a few sections that deal with how the money is treated, the tax treatment of premature withdrawals, and other rules and regulations regarding money deposited in your pension fund account. 80 CCD deduction is not limited to part 1 for the employees. There is an additional benefit available under section 80CCD 1B.
National Pension Scheme (NPS), as the name says it, is a pension scheme and is duly notified by the central government. NPS was first introduced by the central government in the year 2004. Pension Fund Regulatory and Development Authority (PFRDA) has been appointed as the regulatory authority for NPS.
In an NPS account, the funds you deposit are invested across asset classes: equity, company debt, and government securities. Many taxpayers pick this as their top 80CCD income tax deduction choice because of the retirement benefits it provides.
There are two ways you can tackle your NPS account.
Auto-choice: The auto choice is when the allocation of your corpus towards equity and debt changes according to your age automatically according to the levels set by the government. There are three modes in auto choice: conservative, aggressive and moderate. The equity allocation is more in ‘aggressive’, lesser in ‘moderate’, and least in ‘conservative’.
Here’s a table that explains how the auto choice handles your pension scheme corpus.
E stands for equity
C stands for corporate bonds
G stands for government securities
|Moderate Life Cycle Fund||Aggressive Life Cycle Fund||Conservative Life Cycle Fund|
|Asset class in (%)||Asset class in (%)||Asset class in (%)|
|Up to 35 years||50||30||20||75||10||15||25||45||30|
Active choice: Active choice mode is completely different. You get to decide the allocation according to the best judgement of your risk levels. There is a cap of 75% on the amount of corpus you can invest in equities. However, the cap changes after you turn 50.
Equity allocation reduces by 2.5% every year after you turn 50, in case you were already at the upper limit of equity investments.
Say you were invested 75% in equities at the age of 50, your limit will fall to 72.5% at the age of 51 which is also the upper limit for equity investment at that age, the upper limit tapers again to 70% (-2.5%) for a 52-year-old subscriber and so on and so forth till the subscriber turns 60.
The upper limit under active choice after the age of 50
|Age||Upper limit of equity allocation|
There are around seven pension fund managers in the country that manage the NPS deduction section. They are:
Section 80CCD(1B) expressly addresses contributions made by an individual (employee or self-employed) to central government-notified pension systems. This clause allows for an additional deduction of Rs 50,000 over and above the Rs 1.5 lakh 80C limit. That is, an individual can claim a total deduction of Rs 2 lakh by investing in 80C and contributing to a national pension programme under section 80CCD (1B)
Section 80CCD of the Income Tax Act of 1961 provides for tax deductions for individuals and businesses who contribute to government pension systems such as the NPS.
The Section 80CCD deduction limit is as follows:
The maximum deduction available under Section 80CCD is 2,000,000. This sum includes the additional 50,000 deduction provided under Section 80CCD subsection 1B.
Section 80CCD deductions can be claimed while filing your annual income tax returns. You may be required to produce documentation of contribution to the NPS or APY when reporting your tax deductions.
Contributions to NPS funds can be made in cash or by check, and both can be deducted.