Whoever is earning more than the prescribed income limit, be it a salaried employee, freelancer, or businessman, is required to pay taxes every financial year.
However, under the Income Tax Act, 1961, there
are certain deductions that taxpayers can use to reduce their tax liability. These deductions come under Section 80CCD. The purpose is to inculcate long-term financial planning among citizens of India.
Section 80CCD of the Income Tax Act, 1961, allows deductions for contributions to pension schemes notified by the Central Government. This section primarily deals with the National Pension System (NPS) and Atal Pension Yojana (APY).
Which Are Those Sections?
Sections 80CCD(1) and 80CCD(1B) sections offer tax benefits for saving towards your retirement. You can claim deductions for contributions to NPS and APY, with an overall maximum limit of Rs 2 lakh (including the additional deduction of Rs 50,000 under Section 80CCD(1B)).
It’s important to consider your salary/income and chosen tax regime while maximising these deductions.
What schemes are covered under Section 80CCD?
National Pension System (NPS): This is a voluntary pension scheme offered by the government.
Atal Pension Yojana (APY): This is a government-sponsored pension scheme targeted towards the economically weaker sections.
1. Section 80CCD(1)
This section pertains to individual contributions to the NPS, which include:
Self-employed individuals: Deduction is limited to 20% of gross total income.
Salaried individuals: Deduction is limited to 10% of salary (basic + DA).
2. Section 80CCD(1B)
This section provides an additional deduction for contributions to the NPS up to Rs 50,000. This is over and above the limit of Rs 1.5 lakh available under Section 80C.
3. Section 80CCD(2)
This section pertains to employer contributions to the NPS:
The deduction is limited to 10% of salary (basic + DA) for salaried employees.
This benefit is not available to self-employed individuals.
The benefits under Section 80CCD differ depending on the tax regime you choose:
Old Tax Regime: You can claim the full benefits of both Section 80CCD(1) (up to Rs 1.5 lakh) and the additional deduction under Section 80CCD(1B) (up to Rs 50,000), allowing a maximum deduction of Rs 2 lakh for NPS contributions.
New Tax Regime: However, if you choose the new income tax regime, you will have to forgo the deductions available under Section 80CCD (1) and Section 80CCD (1B). Nevertheless, you can still claim income tax deductions for contributions to the NPS under Section 80CCD (2) in the new regime.
The tax benefit available under Section 80CCD(2) depends on whether a taxpayer has chosen the old tax regime or the new one. This section allows a deduction only for contributions made by the employer to the National Pension System (NPS), and not for any amount invested by the individual.
Under the new tax regime, the employer’s contribution qualifies for deduction up to 14 percent of the employee’s salary, which is calculated as basic pay plus dearness allowance. In the old tax regime, the deduction limit is lower for private-sector employees and is capped at 10 percent of salary. However, Central and State government employees are allowed to claim a higher deduction of up to 14 percent of salary under both the old and the new tax regimes.
It is important to note that this benefit is available only on employer contributions. As a result, self-employed individuals cannot claim any tax deduction under Section 80CCD(2), since there is no employer contribution involved.
