Section 80CCD (1) and 80CCD(2)

Section 80CCD is primarily related to the deductions that are available to individuals for the contributions made to the National Pension Scheme or the Atal Pension Yojana.

What is Section 80 CCD

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 of the Income Tax Act. 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).

These income tax deductions sections are 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. The section 80CCD deals with tax deductions and reliefs given for contributions made to the pension fund account.

Section 80CCD (1) and 80CCD(2)

Following is the detailed overview of Section 80CCD (1) and 80CCD(2).

  • Section 80 CCD (1)

Section 80CCD1 allows every tax-paying individual in India to get tax deduction benefits from the amount you deposit in your NPS 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 80CCD exemption limit reduces 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.

  • For an employee, the amount should not cross 10% of the basic salary and dearness allowance (DA) in the financial year.

  • For the self-employed, the limit is 10% of their income up to Rs 1.5 lakh.
  • Section 80 CCD (2)

Section 80CCD 2 refers to a tax benefit for employers with 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.

National Pension Scheme under 80CCD

  • NPS is an organized pension scheme for self-employed, private, and government employees. It is a useful investment instrument for creating a retirement corpus.
  • An individual must contribute to NPS until the age of 70. It is compulsory for Central Government employees. For other individuals, it is voluntary.
    To stand eligible for tax deduction under the NPS Tier 1 Account, you are required to contribute a minimum of Rs 6,000 per annum or Rs 500 per month.
  • To stand eligible for tax deduction under the NPS Tier 2 Account, you are required to contribute a minimum of Rs 2,000 per annum or Rs 250 per month.

Atal Pension Yojana (APY) under 80CCD

  • APY is a government scheme helpful for securing the retirement phase of an individual. It assures a minimum pension payment to investors after retirement.
  • Under APY, tax deductions up to Rs 1,50,000 are eligible under section 80CCD (1). Note that an additional investment of up to Rs 50,000 is eligible for tax deduction under section 80CCD (1B). Also, a self-employed person can claim a deduction of a maximum of Rs 1,50,000 for Atal Pension Yojana investments that are up to 20% of their annual income.

Certain Conditions for Deductions under Section 80CCD of Income Tax Act, 1961

Here are some of the key terms and conditions that are to be adhered to for claiming national pension scheme 80CCD-

  • Under Section 80CCD, deductions can be claimed by both salaried as well as self-employed people. While on the one hand, it is obligatory for government employees, on the other hand, it is voluntary for other individuals.

  • Rs 2 lakhs is the 80CCD (2) maximum limit that can be claimed under the section. It contains the additional deduction of Rs 50,000 that is available under 80CCD (1B).

  • Tax benefits that have been claimed under Section 80CCD cannot be claimed again under the Income Tax Act's Section 80C. Simply put, the merged deduction under Section 80C and Section 80CCD can be at most Rs 2 lakhs.

  • The money that has been received from the National Pension Scheme as monthly payments or surrendered accounts will be taxed according to the pertinent tax provisions.

  • If any amount that has been received from the National Pension Scheme is reinvested in the annuity plan, it will be completely exempt from tax. The deductions that can be claimed under Section 80CCD would be available for the claim at the financial year's end when a person files the tax returns.
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Things to Keep in Mind About 80CCD Deduction

  • The limit given in section 80CCD income tax deduction in part (1) is to be read along with section 80C and section 80CCC. All these three sections together offer a tax relief of Rs 1.5 lakh.

    Say you invested Rs 1 lakh in 80C and 1 lakh for an 80CCD deduction in part 1; the total benefit that you will get out of these two investments is Rs 1.5 lakh only and not Rs 2 lakh.

  • Section 80CCD (2) deduction is for employer contribution, and 80CCD (1) is for employee contribution.

  • You can be an employee or self-employed as well.

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