Section 80CCD1B of the Income Tax Act was brought into the ambit of section 80 CCD with effect from April 1, 2016. According to the Income Tax Act, all individuals who are eligible for claiming tax deduction under section 80CCD 1 can claim an additional deduction of Rs 50,000 for their contribution to pension schemes.
Contribution to the pension fund scheme gets you tax benefits across three sections:
Section 80 CCD(1): Rs 1.5 lakh. This section is a part of section 80C. Note that the limit provided under section 80CCCD(1) has to be read along with section 80C. The tax deduction limit across sections 80C, 80CCD (1), and 80CCC together is Rs 1.5 lakh and not individually.
Section 80 CCD(1B): The 80CCD1B limit is Rs 50,000. This is an additional benefit.
The total tax benefit that you can claim from your contributions to pension fund schemes is Rs 2 lakh. Rs 1.5 lakh under section 80 CCD (1) + Rs 50,000 under section 80CCD1B.
The pension fund scheme being talked about in the aforesaid sections is National Pension Scheme (NPS). It is a retirement scheme that is notified by the central government that offers tax benefits to us under various sections of the income tax act.
Contribution: After you open your NPS account, there are certain rules and regulations that you will have to follow regarding how much you need to deposit. These are important to keep your account active.
After this, you need to keep making yearly contributions until the age of 60. Pension accounts will invest in equities, government and company bonds throughout the tenure of the plan.
You can choose between:-
In Active choice, you have the freedom to choose your allocation but only till the age of 50. The maximum allocation towards equity is 75% for a 50-year old subscriber. After that, the upper limit for equity allocation reduces every year by 2.5%.
Here, your account follows government-mandated levels and changes allocations according to your age. There are three modes under auto choice. The difference between all the life cycle modes is the contribution to equity and debt according to the risk level. It is assumed that the risk level at younger ages is more than at elderly age groups.
So equity levels have been kept the most at young age groups and it gradually decreases accordingly, following the cycles mentioned below.
Equity levels are highest for aggressive mode and reduce gradually in moderate and conservative modes. Debt investment levels are lowest in aggressive, a bit higher in moderate mode, and highest in conservative mode.
There are two types of NPS accounts
Tier 1 Account: A tier 1 account is one where you get tax benefits. This is the primary account with retirement benefits. This section applies as National Pension Scheme 80CCD and 80CCD (1B). This is the regular NPS account that we have talked about in this space.
Tier 2 Account: A tier 2 account is more like voluntary savings account with no restrictions that are applied to a tier 1 account. Restrictions on withdrawal, minimum investment every year are not present in this account. However, the catch is you can open a tier 2 account only when you already have a tier 1 account.
Therefore, a Tier 1 account is the one you open at the first instance. You can open a tier 2 account only if you have opened a tier 1 account.
Accordingly, there will be a corpus ready at the age of 60 on the basis of all the yearly contributions you have made. You can withdraw 60% of that corpus and 40% of it necessarily has to be in an annuity plan. The 60% amount can be withdrawn lump-sum and is tax-exempt. The balance of 40%, which is the annuity, is taxable in the year of receipt.
At the time of premature withdrawal, you can take only 20% of the corpus out which is also taxable. Rest 80% has to be put back into the annuity plan. Both, the withdrawal and receipt of the amount from the annuity plan are taxable.
Premature withdrawal is not allowed for any and every kind of expenditure. Pension Fund Regulatory and Development Authority of India (PFRDA) has given out certain guidelines.
You can only make a premature withdrawal for certain specific medical emergencies, children’s marriage, and a few others.
This pension fund scheme has a slightly longer lock-in period. The lock-in period stays till you turn 60 years of age. In comparison to its peers, for example, public provident fund (PPF), the lock-in period is 15 years.
Q1. What exactly is Section NPS 80CCD 1B?
Contributions to Tier 1 are tax-deductible and are eligible for deductions under Sections 80CCD(1) and 80CCD(2) (1B). This means that you can invest up to Rs. 2 lakh in an NPS deduction Tier 1 account and claim the full amount as a deduction, i.e. Rs. 1.50 lakh under Section 80CCD(1) and Rs. 50,000 under Section 80CCD(2) (1B).
Q2. Who is eligible to claim 80CCD1B?
Any individual who is a subscriber to an NPS can claim a tax benefit under Section 80 CCD (1) up to a maximum of Rs. 1.5 lac under Section 80 CCE. Under paragraph 80CCD, NPS members are eligible for an extra deduction of up to Rs. 50,000 for investments in NPS (Tier I accounts) (1B).
Q3. What’s the distinction between 80CCD 1 and 80CCD 2?
Section 80CCD (1) deals with an employer’s investment or contribution to such a pension system, whereas section 80CCD (2) deals with an employer’s contribution to an employee’s pension account. Section 80CCD addresses a tax deduction and relief for payments made to a pension fund account.
Q4. Is the Atal Pension Yojana tax deductible?
A subscriber to the Atal Pension Yojana account is eligible for tax benefits, including a Rs. 50,000 extra deduction under Section 80CCD (1) of the Income Tax Act. The savings made through this scheme are tax-free. The more you invest, the larger your pension will be.
Q5. What is the upper limit allowed under Section 80CCD?
Deductions under Section 80CCD (1) are limited to INR 1.5 lakh per year, with an additional deduction of INR 50,000 available under Section 80CCD (1B), bringing the total deduction limit to INR 2 lakhs.