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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 deals with a tax deduction and reliefs given for contributions made to the pension fund account.

Section 80 CCD (1)

Section 80CCD1 allows every tax-paying individual of 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 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.

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

Things to keep in mind

  • 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 is for employer contribution and 80CCD 1 is for employee contribution
  • You can be an employee or self-employed as well

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. Apart from the sections mentioned above, there are 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.

What is NPS?

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

AUTO CHOICE
Moderate Life Cycle FundAggressive Life Cycle FundConservative Life Cycle Fund
Asset class in (%)Asset class in (%)Asset class in (%)
AgeECGECGECG
Up to 35 years503020751015254530
40 years402535551530203545
45 years302050352045152560
50 years201565202060101575
55 years1010801510755590

Active choice: Active choice mode is completely different. You get to decide the allocation according to the best judgment 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

AgeUpper limit of equity allocation
5075%
5172.5%
5270%
5367.5%
5465%
5562.5%
5660%
5757.5%
5855%
5952.5%
6050%

Pension Fund Managers

There are around seven pension fund managers in the country that manage NPS accounts. They are:

  • Birla Sun Life Pension Management Ltd.
  • HDFC Pension Management Company Ltd.
  • ICICI Prudential Pension Funds Management Company Ltd.
  • Kotak Mahindra Pension Fund Ltd.
  • LIC Pension Fund Ltd.
  • Reliance Capital Pension Fund Ltd.
  • SBI Pension Funds Private Ltd.
  • UTI Retirement Solutions Ltd.
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