Understanding Deductions Under Section 80CCD of the Income Tax Act

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.

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

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

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:

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%

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

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.

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.