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.

Who all are eligible?

  • Employed
  • Self-employed
  • NRIs

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.

Total Tax 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.

Things to keep in mind

  • If you invest a full Rs 1.5 lakh in NPS to claim tax benefit under section 80 CCD (1), you will not be able to use any other tax benefits that are available under section 80 C.
  • Examples of other tax benefits are equity-linked savings scheme (ELSS), public provident fund (PPF), five-year fixed deposits, and few more.
  • The benefit you get for NPS in 80CCD1B is additional. It is over and above the tax benefit provided in section 80 CCD 1. The 80CCD1B limit, as mentioned before, is Rs 50,000.
  • Therefore, section 80 CCD1 is a part of section 80C and section 80CCC’s upper limit. All sections together give Rs 1.5 lakh benefit.

Which is the pension fund scheme?

The pension fund scheme being talked about in the aforesaid sections is the National Pension Scheme (NPS). It is a retirement scheme which is notified by the central government that offers tax benefits to us under various sections of the income tax act.

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How does this scheme work?

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.

  • Your minimum yearly contribution should be at least Rs 1,000
  • Each contribution should not be less than Rs 500
  • You should make at least one contribution every year

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:-

Active choice

Here you get to decide how much is your NPS account to invest in the different assets. You can change the allocation to equities and debt accordingly throughout the life cycle of your NPS account’s tenure. 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%.

Auto Choice

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.

  1. Aggressive life cycle mode
  2. Moderate life cycle mode
  3. Conservative Life Cycle Mode

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.

Withdrawal and Annuity Rules

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 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.

The 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.

Types of NPS Account

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 to section 80CCD (1) 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 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 in the first instance. You can open a tier 2 account only if you have opened a tier 1 account.