Unlocking Income Tax Deductions under Section 80CCD(1B)
Updated: Aug 2
In tax planning, the knowledge of various income tax provisions related to deductions can make a lot of difference. One such welcome provision is Section 80CCD(1B) of the Income Tax Act, which particularly covers contributions done towards the National Pension Scheme or NPS. This section becomes very important to those who want to plan their retirement while making optimum use of current tax liabilities. The following article will cover the details of Section 80CCD(1B), explaining how it works, who can benefit from it, and the strategic advantages that accrue toward it for long-term savings.
Table of Contents
Overview of Deduction Under Section 80CCD(1B) and 80CCD(1)
As per 80CCD(1), a salaried individual in the private and public sectors or a self-employed person can claim deductions based on their contribution to the NPS account. The allowable deduction is 10% of the salary or gross total income for NPS contributions, whichever is lower. The maximum limit for deduction under 80CCD(1) is Rs. 1,50,000.
After all your 80C deductions, you can get an additional Rs—50,000 deduction for your contributions towards the National Pension System (NPS). Together, you can get up to Rs. 2,00,000 tax deductions under sections 80CCD(1) and 80CCD(1B).
For example, invest Rs. 2,00,000 in the PPF scheme and contribute Rs. 70,000 to the NPS. Now, you are eligible for an 80C deduction of Rs. 1,50,000 and Rs. 50,000 under 80CCB(1). Your total tax deduction will be Rs. 2,00,000.
Is NPS a Good Scheme?
Salaried and self-employed individuals must think of their future while planning their finances. The NPS is a government-sponsored pension scheme that is available to Indian citizens. There are two main benefits of NPS:
Tax saving while you work
Regular income stream after retirement
The NPS is an ideal scheme for building wealth for the future. As you pay monthly towards NPS, you will accumulate funds, which will be disbursed to you at specific intervals after retirement. The retirement corpus you build now will fund your future expenses.
The government's NPS scheme invests your money in multiple investment avenues and securities. The equity market offers better returns for the investment, offering equity exposure with minimal investment requirements. As with any equity-based investment, you will not know the exact amount you can get as a return. However, NPS has been found to provide consistent returns for investors.
Key points:
Diversification: NPS spreads investments across different avenues.
Equity Potential: Offers exposure to the equity market for potentially higher returns.
Minimal Investment: Requires low initial investment for equity exposure.
Consistent Returns: NPS has shown reliability in delivering steady returns over time.
NPS Account Types
When you contribute to NPS schemes, you must know the different options. Investing wisely for tax savings and wealth building is crucial for better returns. NPS accounts are of two types:
Tier 1 – Pension Account
A pension account provides a steady pension—your monthly income after retirement. Money invested in Tier 1 has a lock-in period. You can get returns only after you reach the age of 60. However, partial withdrawal can be done in emergencies under specific conditions.
Apart from the above exciting features, a Tier 1 account is eligible for tax deductions proportionate to the amount of money you invest. Under Section 80CC1(D), you can claim a maximum deduction of Rs. 1.5 lakh and you can claim an additional Rs. 50,000 as deduction under Section 80CCD(1B). In total, you can claim a Rs. 2 lakh deduction.
Tier 2 – Additional Account
As the name implies, it is an additional account for which you can contribute voluntarily. There are no lock-in restrictions, and any number of withdrawals are allowed. However, you must be a Central Government employee to claim a tax deduction. Individuals can contribute to a Tier 2 account, but tax deductions are accessible only to Central Government employees. Only if you already have a Tier 1 account can you open a Tier 2 account.
NPS contributions are now categorised as Exempt-Exempt-Exempt (EEE) for taxation. This means that the contributions to NPS, the income generated from NPS, and the total maturity amount are all tax-exempt.
The recent guidelines dictate that you can withdraw a maximum of 60% of the amount on maturity. However, you must reinvest the 40% in the annuity scheme to generate a monthly income plan for your future.
Claiming eligibility for deduction under Section 80CCD(1B)
Opening an NPS account and contributing to it has some age restrictions. You can claim Section 80CCD (1B) deductions only with an active NPS contribution. The eligibility restrictions are as follows:
Resident individuals between the age of 18-70 years
Non-resident individuals (NRIs) between the ages of 18-70 years. However, suppose NRIs change their citizenship status and become citizens of another country after investing in NPS. In that case, the NPS scheme will be terminated for them, and a deduction won't be applicable.
Individuals with an active NPS subscription are eligible for Section 80CCD(1) deductions.
Invest in NPS for tax benefits
Opening an NPS account can be done online or offline. The NSDL e-Gov Protean website lets you open an online NPS account seamlessly. If you want to create an NPS account offline, you can approach a Point of Presence (POP). Financial institutions such as banks and some non-banking financial companies (NBFCs) are authorised to be POPs. They can help you create an NPS account offline. With an active NPS subscription, you can get tax benefits.
Remember that tax benefits are only applicable to Tier 1 accounts. There are no tax benefits for opening a Tier 2 account.
The tax benefits of the NPS scheme don't end during your work years. The NPS scheme attains maturity when you reach 60 years old. Then, you can withdraw 60% of the accumulated amount as a lump-sum payment on maturity. This is exempt from tax. Apart from this, you will also receive annuity payments using 40% of the remaining investment. However, your annuity payment will be considered your income and incur tax at the regular income tax slab rates.
Points to remember for deduction under Section 80CCD(1B)
Some of the points you need to know while claiming 80CCD(1B) deductions are:
Section 80CCD(1B) is applicable to resident and non-resident salaried and self-employed individuals who subscribe to NPS
Tier 2 NPS accounts are not eligible for Section 80CCD(1B) deductions
Only Tier 1 NPS accounts are eligible for additional Rs. 50,000 deductions as per Section 80CCD(1B)
At the time of return filing, attach documents related to NPS contributions
NPS partial withdrawals are allowed under specific conditions
Total maximum deduction under Section 80CCD(1) and 80CCD(1B) is Rs. 2 lakh
If the taxpayer suddenly passes away, the nominee can close the NPS account and get the lump sum benefit, exempt from tax.
Documents to Claim Tax Deductions
As with any tax benefit, you must submit document proof at the time of income tax filing. The following documents are needed:
Proof of investment
Receipt for NPS contribution towards Tier 1 account. You can download this online from your NPS account
Aadhaar card
PAN card
Bank account statement
Overview of Tax Benefits Apart from Deductions
Deductions are not the only tax benefits for NPS account subscribers. Based on the maturity period, withdrawal benefits are available. Let’s explore the different benefits:
Partial Withdrawal – Partial withdrawal from a Tier 1 NPS account is allowed for specific purposes. This amount is exempted from tax under Section 10(12B).
Annuity Purchase – The amount you invest to purchase an annuity is completely exempt from tax. However, the annuity income you receive after the age of 60 will be subject to income tax.
Lump Sum Withdrawal – 60% of the total corpus withdrawn as a lump sum at maturity is entirely exempt from tax.
Consider the following example: The total corpus accumulated at maturity is Rs. 10,00,000. Here, 60% is Rs. 6,00,000. You don't have to pay any tax for withdrawing this amount. The remaining 40%, i.e. Rs. 4,00,000, must be used for annuity purchase. No tax is involved at this time for investing the 40% of the corpus. Annuity income generated from Rs. 4 lakh investment will incur income tax according to the tax slab.
Conclusion
Investing in the NPS pension scheme secures your future with retirement and tax benefits. A Tier 1 account allows deductions under Section 80CCD(1B) and 80CCD(1) up to Rs. 2 lakh. The retirement corpus supports your post-retirement life, and annuity payments help maintain your lifestyle. Want to read more about the latest tax benefits? Check out TaxBuddy for expert tips and suggestions on maximising tax benefits.
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FAQ
Q1. What is the purpose of Section 80CCD(1B) and 80CCD(1) under the Income Tax Act?
As per Section 80CCD(1), you can claim deduction for contribution towards pension scheme. The Section 80CCD(1B) allows for an additional deduction on contribution towards the National Pension Scheme (NPS).
Q2. Who is eligible to claim deductions under Sections 80CCD(1B) and 80CCD(1)?
Indian residents and non-resident individuals (NRIs) between the ages of 18-70 are eligible to claim deduction under Sections 80CCD(1B) and 80CCD(1). NRIs can claim deductions as long as they hold Indian citizenship.
Q3. Can I claim Section 80CCD deductions for contributions to other pension schemes?
No, you can claim deductions under Section 80CCD(1) and 80CCD(1B) only for contribution towards the National Pension Scheme (NPS).
Q4. What is the total deduction amount available with Section 80CCD?
You can claim Rs. 2,00,000 in total under both Sections 80CCD(1) and 80CCD(1B).
Q5. Can salaried individuals claim deductions under Sections 80CCD(1)?
Yes, anyone contributing to NPS can claim deductions under Sections 80CCD(1) and 80CCD(1B).
Q6. How much additional deduction under Section 80CCD(1B) is permitted over and above the limits stipulated in Section 80CCD(1)?
Section 80CCD(1B) provides for deduction up to Rs. 50,000 for contribution to NPS, over and above the Rs. 1,50,000 limit under Section 80CCD(1).
Q7. Will the additional deduction under Section 80CCD(1B) apply for both Tier 1 and Tier 2 NPS accounts?
The additional deduction under Section 80CCD(1B) is available only in respect of payment made to the Tier 1 NPS account.
Q8. Is the deduction under Section 80CCD(1B) available to self-employed people also?
Yes, any self-employed person can claim a deduction of Rs. 50,000 under Section 80CCD(1B) for his contributions to the NPS.
Q9. Is there a specific period within the financial year during which the contribution can be made for which deductions can be claimed in Section 80CCD(1B)?
Contributions made to the NPS at any time during the financial year are available for deduction under section 80CCD(1B) in the same fiscal year.
Q10. What if I contribute more than Rs 50,000 per annum to NPS? Can I carry forward the excess for deduction under Section 80CCD(1B) in the next year?
No, the deduction u/s 80CCD(1B) can be claimed to a maximum of Rs. 50,000 per financial year, and any amount over and above Rs. 50,000 cannot claim a carryover benefit for the purpose of tax deduction in subsequent years.
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