Section 80CCD: Tax Deductions for Contributions to NPS and APY

The Indian Government has introduced various provisions to help reduce citizens’ tax liabilities. Many of these provisions also encourage the habit of investing. Among them is Section 80CCD of the Income Tax, 1961. Under this section, you could claim deductions for investing in investments.

These are the Atal Pension Yojana (APY) and National Pension Scheme (NPS). Both salaried and self-employed individuals can claim these benefits. As per the provisions mentioned in the section, you can claim a deduction of up to ₹2 Lakhs.

Provisions of Section 80CCD

This section has many subsections that outline the deduction available to the taxpayer. Here is an overview of them:

1. Section 80CCD (1)

This subsection deals with deductions for taxpayers contributing to the NPS account. Both salaried employees and self-employed individuals are eligible for deductions under Section 80CCD (1). This also includes employees hired by the government or any other employer.

The tax advantages provided under Section 80CCD (1) are:

10% of their annual salary (basic + dearness allowance) for salaried individuals
20% of last year’s gross total income for self-employed individuals

The maximum deduction available under this section is ₹1.5 Lakhs. This is regardless of the nature of employment or income.

2. Section 80CCD (2)

Under the NPS corporate model, an employer can contribute to employees' pension funds. Employees can claim a deduction for such contributions u/s 80CCD (2). But the employer must make a contribution to the new pension scheme on the employee's behalf.

The deduction allowed under this goes above what is permitted under Section 80C. But it is not available to self-employed people. Here are a few features of Section 80CCD (2):

Employers can make NPS contributions on the employee’s behalf for tax benefits
Employer's contribution can be greater or less than that of the employee
The only party that may contribute on behalf of an employee is the employer

The tax advantages provided under this section are:

In case of State and Central Government employers, you can get a deduction of up to 14% of your salary (basic + DA)
In case of any other employers, you can get a maximum deduction of up to 10% of your salary (basic + DA)

The employer can claim a tax break if they claim these NPS contributions as a business expense. This is classified in the profit and loss account. It is capped at 10% of the salary (basic + DA).

3. Section 80CCD (1B)

To encourage more contributions to NPS, a new subsection was introduced under the Act. It offers an extra deduction of up to ₹50,000. Both salaried and self-employed individuals can claim this deduction. This deduction is available under the old tax regime.

For instance, if you have savings or investments of ₹1.5 Lakhs under Section 80C. You can still contribute to NPS and claim a deduction of up to ₹50,000 under Section 80CCD (1B). So, the total available deduction for you will be ₹2 Lakhs.

Terms and Conditions for Deductions u/s 80CCD

It is crucial to know the conditions under which you can claim a deduction. This may help you improve your finances. Here is an overview of when the deduction is applicable u/s 80CCD:

Indian citizens and NRIs who make contributions to NPS or APY
Self-employed and salaried individuals in the public or private sector are also eligible
NPS and APY contributions are eligible for Section 80CCD deductions

Maximum deduction permitted under Sections 80C, 80CCC, 80CCD (1), and 80CCD(1B) is ₹2 Lakhs
Self-contributions made to NPS or APY allow for an additional deduction of ₹50,000
It is not possible to claim the same deductions under Section 80CCD if already claimed u/s 80C
Income tax is applicable to pension payments received post-retirement from NPS
Deductions u/s 80CCD (1) are only available in the old tax regime
Deductions u/s 80CCD (2) are available in the old as well as the new tax regime

Tax Implications on Withdrawal of NPS and Monthly Pensions

Here is an overview of the taxation rules regarding withdrawal from NPS:

You can withdraw up to 60% of the NPS corpus as a tax-free lump sum at retirement
At least 40% of the NPS corpus must be used to purchase an annuity at retirement
The NPS corpus used to buy annuity at retirement is tax-free
The monthly pension received from the annuity is taxable as per the income tax slab
After 3 years, you can make tax-free partial withdrawals of up to 25% of your contributions for specific purposes

Section 80CCD Deduction in New and Old Tax Regimes

Your tax liability will differ significantly depending on the regime you choose. Here is an example to help you understand the difference between them.

Suppose you earned a basic salary of ₹15 Lakhs in FY 2023-24 and you deposited ₹1 Lakh in PPF and ₹1 Lakh in NPS. Here, the PPF contribution will be claimed as a deduction u/s 80C.

The remaining ₹50,000 of the limit will be claimed u/s 80CCD (1), which will reflect the contribution in NPS. The remaining NPS contribution of ₹50,000 can be claimed u/s 80CCD (1B). The employer’s contribution of 14% of salary ( effective from 1st April, 2025) will be claimed as deduction u/s 80CCD (2).

Here is a tabular representation of the tax calculation under both regimes:

Particulars	Old Regime	New Regime
Annual Salary	₹15,00,000	₹15,00,000
Standard Deduction u/s 16	₹50,000	₹75,000
Net Income	₹14,50,000	₹14,50,000
PPF Deductions u/s 80C	₹1,00,000	-
NPS Deduction u/s 80CCD (1)	₹50,000	-
NPS Deduction u/s 80CCD (1B)	₹50,000	-
Employer’s Contribution Deduction u/s 80CCD (2)	₹1,50,000	₹2,10,000
Total Income	₹11,00,000	₹13,00,000
Tax on Total Income	₹1,48,200	₹1,14,400

Note: The above figures are for illustration only. Your actual tax liability may vary depending on other income additions and deductions.

National Pension System Deductions Under Section 80CCD

This investment vehicle is open for self-employed and salaried individuals. It applies to those in the private and public sectors. Investments in NPS are restricted until retirement or reaching superannuation. But you can continue to invest up to the age of 70.

You can claim tax deductions under Section 80CCD for contributions to this scheme. Before you invest, know the following important facts about the scheme:

Participation in NPS is optional for everyone except Central Government employees
There are two account types in NPS: Tier I and Tier II
Private sector employees can only deduct NPS contributions made to Tier I accounts
Employees working in the public sector can deduct payments to Tier I and Tier II accounts
At maturity, up to 60% of the NPS corpus may be withdrawn tax-free
Acquisition of annuities must be made with the remaining 40%

Atal Pension Yojana Deduction Under Section 80CCD

This is a government-sponsored retirement scheme. It offers individuals a guaranteed minimum annuity after retirement. The unorganised industry is the target market for this pension initiative.

Individuals aged between 18 and 40 years can apply. It needs a minimum period of 20 years before the payments are released from 60 years of age. Premature withdrawals are permitted under certain conditions.

Listed below are certain tax advantages associated with APY:

Up to ₹50,000 in APY as a second investment qualifies for a deduction u/s 80CCD (1B)
Depending on the number of payments made, you may receive a monthly pension of ₹1,000, ₹2,000, ₹3,000, ₹4,000, or ₹5,000
The applicant's spouse will receive the pension if they pass away after 60 years
Spouses of deceased subscribers (under 60 years) can claim the corpus or opt for pension

How to File a Section 80CCD Deduction Claim

At the end of the year, when you file your ITR, you can claim deductions under Section 80CCD. To claim the deductions, present the necessary documentation. These may include investment receipts or other evidence of contributions to the scheme.

Things to Keep in Mind on Section 80CCD

While planning your taxes, keep in mind that the limit under Section 80CCD in part (1) is to be considered alongside sections 80C and 80CCC. The three sections offer a combined tax relief of ₹2 Lakhs. Additionally, Section 80CCD(1B) permits an extra deduction of up to ₹50,000 for contributions to NPS.

Say you have invested ₹1 Lakh u/s 80C and ₹2 Lakhs u/s 80CCD (1). In this case, the tax deduction will be ₹1.5 Lakhs and not ₹3 Lakhs. You can claim an additional deduction of up to ₹50,000 u/s 80CCD (1B), bringing the total deduction to ₹2 Lakhs.

What does Section 80CCD cover?

Under this section, you can claim deductions for contributions to NPS and APY.

How do I make a Section 80CCD deduction claim?

You can claim Section 80CCD deductions when you submit your income tax returns. When you record your tax deductions, you may be required to show proof of your APY or NPS contributions.

How much deduction is allowed under Section 80CCD?

Section 80CCD allows for a maximum deduction of ₹2 Lakhs. This sum includes an additional ₹50,000 deduction only allowed under Section 80CCD (1B).

How much can you deduct under Section 80CCD?

The maximum deduction allowed by Section 80CCD is ₹2 Lakhs. This includes the additional ₹50,000 permitted u/s 80CCD (1B). In Section 80CCD (2), the deduction for the employer’s contribution can be up to 14% of the salary. This applies to Central or State Government employers. The new deduction rate, changed from 10% to 14%, will be applied to public-sector and private-sector entities under the revised regime.

Who is eligible to claim tax deductions u/s 80CCD?

You can claim deductions u/s 80CCD if you have made contributions towards NPS or APY.

Can I claim tax deductions u/s 80CCD 1B as well as u/s 80CCD 1?

Yes, you can claim deductions under both sections. But 80CCD (1) is inclusive of 80C and 80CCC, meaning you can claim a total of ₹1.5 Lakhs in these sections. For 80CCD (1B), you can claim an additional deduction of up to ₹50,000.