Every citizen with an annual income over a specific threshold is liable to pay taxes. While taxes tend to weigh down on an individual’s income, one can reduce liability by availing of the tax exemption extended by the government of India. This is especially handy for individuals saving towards a retirement corpus.
Under Section 80 of the Income Tax Act, individuals claim deductions. Especially under Section 80CCD, any contributions towards specific pension schemes that are backed by the government. This helps save on taxes and, in turn, protects the retirement corpus from eroding.
On that note, let us learn more about tax deductions under CCD to make the most of the provisions and save hard-earned money with greater efficiency.
What is Section 80CCD?
Section 80CCD of the ITA enables to claim tax deductions in two pension schemes, namely –
National Pension Scheme
Atal Pension Yojana
Notably, the maximum amount of tax deduction that one can claim under Section 80CCD is Rs. 2 lakhs in a given fiscal year.
Deductions under section 80CCD are further divided into two distinct subsections:
- Section 80CCD(1)
- Section 80CCD(2)
This distinction helps categorize pension fund contributions by taxpayers and employers.
Individuals can claim a tax deduction of a maximum of Rs. 1.5 lakhs under Section 80CCD (1), along with an additional Rs. 50,000 under Section 80CCD (1B) in a fiscal year.
The subsection-wise of tax deductions is given below:
- Under section 80CCD, the monetary contributions by a private or self-employed person to the National PensionScheme or the Atal Pension Yojana are eligible for deductions of a maximum of Rs. 1.50 lakhs in a given financial year.
- The contributions by government employees towards NPS are also eligible for tax deductions under CCD(1).
- Section 80CCD(1B) allows an additional deduction of Rs. 50,000 above the pension contribution made under 80CCD(1).
- Section 80CCD(2) says that the contributions by employers towards employees’ pension fund qualifies for tax deductions. However, such a deduction is limited to only 10% of an employee’s basic salary + dearness allowance or DA.
Note that the upper ceiling of Rs. 1.5 lakh deduction is inclusive of deductions under Section 80C, 80CCC, and 80CCD(1), which means one can claim a maximum of Rs. 1.5 lakh under those sections combined.
80C: Individuals can claim a deduction of up to Rs. 1.5 lakhs on tax-saving investment instruments, which may include insurance plans. Make sure to check tax deduction insurance meaning and provisions to know if you can claim deductions on insurance as well as pension plans.
80CC: Allows a tax deduction of up to Rs. 1.5 lakhs on contributions towards retirement and annuity plans
80CCD(1): Permits tax deduction that is equal to 10% of an employee’s DA and basic salary
However, Section 80CCD(1B) extends a deduction of Rs. 50,000 over this limit. Hence, under all these sections combined, individuals can claim up to Rs. 2 lakhs as a deduction.
National Pension System under 80CCD
All contributions to the National Pension Scheme are eligible for deduction under Section 80CCD of the Income Tax Act, 1965.
NPS is a retirement scheme that was initially directed at government employees. However, later it was opened for others to allow employees in all sectors to benefit from it. Individuals who are over the age of 18 can invest in the National Pension Scheme, which locks in the contributions till the investors turn 60. Notably, NPS is a market-linked investment instrument that is managed by fund managers who park money on behalf of investors across 4 asset classes.
The scheme offers investors the option to continue investing till they turn 70.
While the National Pension Scheme is mandatory for central government employees, it is voluntary for individuals from other sectors.
Tax benefits for NPS:
- Under Section 80CCD of Income Tax, contributions toward National Pension Scheme are eligible for deductions of up to Rs. 2 lakh
- NPS contributions can be paid to 2 accounts, namely- tier-I and tier-II accounts. Notably, contributions made to tier-I are only eligible for tax deductions for private sector employees. However, for government employees, contributions to both types of accounts qualify for deductions.
- On maturity, individuals can withdraw 60% of the accumulated corpus, and the same is free from taxation. They can use the remaining 40% to buy annuities. Notably, the contributions, maturity amount, and interest amount are tax-free.
Atal Pension Yojana under Section 80CCD
Atal Pension Yojana, AKA Pradhan Mantri Pension Yojana, is a government-backed retirement scheme that extends a minimum amount of guaranteed pension amount on retirement.
The scheme is directed at those working in the unorganized sector. Individuals between 18-40 years of age can apply for this scheme to build a retirement corpus throughout their employment period. The contributions are locked in until the investor turns 60. However, they can make premature withdrawals but only under exceptional cases.
The tax benefits of APY include the following:
- Under Section 80CCD(1) of the Income Tax Act, a maximum contribution of Rs. 1.5 lakhs towards APY are eligible for deductions
- Self-employed individuals can raise a claim for tax deductions on APY contributions. The limit for the same is set at 20% of annual income but should not exceed Rs. 1.5 lakhs
- Individuals can claim an additional APY investment of up to Rs. 50, 000 also qualifies for deduction under Section 80CCD (1B)
- Based on their contributions, individuals can get a guaranteed pension amount of Rs. 1000, Rs. 2000, Rs. 3000, Rs. 4000, or Rs. 5000 every month post-retirement.
- Notably, the pension amount is liable for taxation per an individual’s income tax slab.
- In case of the death of the subscriber, their spouse will get the pension. However, if the subscriber dies before they turn 60, their spouse gets the option to either exit the scheme to avail of a lump sum amount or continue the same but in their name to receive a pension post-retirement.
Note that tax deductions under CCD can be claimed during tax return filing. However, to initiate the same, individuals need to submit proof of contributions towards eligible investment plans. Make sure to check the complete list of documents required and other essentials to raise your tax deduction claim without many hassles.