Deductions under Section 80CCD(1B) of Income Tax

With Section 80CCD(1B), you can claim an extra deduction of up to ₹50,000 for contributions made to the National Pension System (NPS) and move closer to a secure retirement plan. Applicable to both salaried and self-employed, this additional 80CCD (1B) deduction enables you to save more on your taxes.

Through this blog, let us explore the details regarding Section 80CCD(1B) of Income Tax Act along with its eligibility criteria, important pointers to remember and how it differs from the other sections, in order to maximize your tax savings.

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What is Section 80CCD(1B) of Income Tax Act?

Introduced in the 2015 Union Budget to promote investments in the National Pension System (NPS) and the Atal Pension Yojana, Section 80CCD(1B) allows you to claim an extra deduction of up to ₹50,000 for contributions made to the National Pension System (NPS).

This additional tax deduction above the 1.5 lakh deduction already available under Section 80CCD(1) offers a valuable opportunity to save more on taxes while securing your retirement. Thus, the total maximum deduction you can claim under both Section 80CCD(1) and Section 80CCD(1B) is now ₹2 lakh. However, this benefit is only available if you choose to opt out of the new tax regime under Section 115 BAC(1A).

To simplify it further, consider the following example:

Let’s say you invest ₹1.5 lakh in various tax-saving instruments under Section 80C, such as Public Provident Fund (PPF), Tax Saver Fixed Deposits (FDs), or life insurance premiums.

In addition, you contribute ₹70,000 annually to the National Pension System (NPS).

Here’s how the tax deduction works:

Under Section 80C, you can claim the full ₹1.5 lakh as a deduction.
For your NPS contribution, you can claim an additional ₹50,000 deduction under Section 80CCD(1B).
This means you can claim a total tax deduction of ₹2 lakh (₹1.5 lakh under Section 80C and ₹50,000 under Section 80CCD(1B)).

So, with your total investment of ₹2.2 lakh (₹1.5 lakh + ₹70,000), you get to reduce your taxable income by ₹2 lakh, thereby lowering your tax liability.

What is the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a pension plan that is sponsored by the government to both salaried and self-employed individuals. Primarily it provides two key benefits including tax savings during an individual’s working years and guaranteeing regular income after retirement.

Managed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS allows both government and non-government employees to save for their retirement. With NPS, individuals can contribute to their pension fund while they are working and contribute to creating a retirement corpus. After retirement, this corpus provides a regular monthly income to the individual.

Types of NPS

Tier 1 (Pension Account)

This account has a fixed lock-in period until you reach the age of 60. Partial withdrawals are allowed, but only under certain conditions.
Contributions to the Tier 1 account are tax-deductible. You can claim up to ₹2 lakhs in deductions: ₹1.5 lakh under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B).

Tier 2 (Savings Account)

The Tier 2 account is a voluntary savings account with no lock-in period, meaning you can withdraw funds whenever you like.
Only Central government employees can claim tax deductions on contributions to a Tier 2 account under Section 80C.
To open a Tier 2 account, you must have a Tier 1 account.
For private-sector employees, contributions to the Tier 2 account do not qualify for tax deductions, and any gains from this account are taxed according to their income tax slab rates.

How to Invest in NPS to Avail Tax Benefits?

You can invest in the National Pension Scheme (NPS) through a financial institution known as a Point of Presence (POP). Most banks and non-banking financial companies are authorized to act as POPs.
These institutions have special branches called Point of Presence Service Providers (POP-SPs) that handle NPS deposits. You can find a list of POP-SPs on the official NPS website
To start investing, you need to submit a filled registration form along with proof of identity, age, and address.

Tax Benefits Under NPS

The Income Tax Act provides tax benefits for contributions to the NPS under the following sections:

Employee’s Contribution

Eligible for a tax deduction under Section 80CCD(1) of the Income Tax Act, up to 10% of your salary (Basic + DA). This deduction is part of the overall limit of ₹1.5 lakh under Section 80CCE.

Employer’s Contribution

Contributions from your employer are eligible for a tax deduction under Section 80CCD(2), up to 10% of your Basic + DA, with no monetary limit. This benefit is in addition to the ₹1.5 lakh limit under Section 80CCE.

Voluntary Contribution

Contribution of up to ₹50,000 to your NPS Tier I account. This amount is eligible for a tax deduction under Section 80CCD(1B), with a maximum deduction of ₹50,000.

Eligibility Criteria for Investing Under Section 80CCD(1B)

Both residents and non-residents can contribute to the National Pension System (NPS).
Minimum age limit is 18 years to start contributing to NPS
Maximum age limit is 70 years to make contributions to NPS.
Non-Resident Indians (NRIs) can also invest in NPS, but their citizenship status must remain the same as when they first invested in NPS.
If an NRI changes their citizenship, their NPS account will be terminated.

How is Section 80CCD (1B) different from Section 80CCD(1) and Section 80CCD(2)?

Section

Deduction Limit

Eligibility

Tax Benefit

Section 80CCD (1)

For salaried employees: 10% of salaries
For self-employed: 20% of Gross Total Income (GTI)

Contributions only made by employees to Tier I NPS accounts

Included within the ₹1.5 lakh limit of Section 80C, covering various tax-saving investments.

Section 80CCD (1b)

Additional deductions of ₹50,000 is permitted, above the deduction of ₹1,50,000 allowed under Section 80C, 80CCC and 80CCD(1)

Same as 80CCD (1)

An extra deduction on top of Section 80CCD(1), increasing total NPS deductions to ₹2 lakh per year.

Section 80CCD (2)

Deduction limit is maximum of 10% of employee’s salary, in addition to the ₹1,50,000 allowed under Section 80C, 80CCC and 80CCD(1)

Contributions made by employers to NPS

Deductible from the employee’s taxable income, separate from the individual limits of Section 80CCD(1) and 80CCD(1B).

Things You Should Know Regarding Deduction Under Section 80CCD (1B)

Both salaried and self-employed individuals can benefit from the tax deduction under Section 80CCD(1B).
Only contributions made to Tier I NPS accounts qualify for this deduction. Contributions to Tier II NPS accounts do not qualify for this benefit.
To claim the additional deduction under Section 80CCD(1B), you need to provide proof of your NPS investments.
The additional ₹50,000 deduction under Section 80CCD(1B) allows you to claim a total of ₹2 lakh in deductions, which is an increase from the standard ₹1.5 lakh limit under Section 80C.
Withdrawals from your NPS account come with certain terms and conditions that must be met.

Disclaimer: Nothing on this blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this blog to make financial decisions. We highly recommend you seek professional advice from someone who is authorized to provide investment advice.