Deductions Under Section 80CCD of Income Tax

What if you get to know that by contributing to a pension scheme, you can reduce your tax liability and claim tax deductions on your earned income? Well, section 80CCD of the Income Tax Act, 1961, provides such tax benefits. Considering this, if you made contributions to the Atal Pension Yojana (APY) or National Pension Scheme (NPS), you can claim tax deductions under section 80CCD. Additionally, this tax deduction is available to both residents and NRIs.

However, to reduce your tax liability and claim the tax benefits under this section, you need to fulfill some eligibility criteria. Want to know about it and available tax deduction options? Read the blog and get your answers.

What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961, offers tax deductions to taxpayers who contribute to government-specific pension schemes. It includes the National Pension Scheme (NPS), Unified Pension Scheme (UPS), and Atal Pension Scheme (APS).

The National Pension Scheme and Atal Pension Yojana are retirement investment schemes introduced by the Indian Government. Both schemes, after the specified time period, provide pension income. Additionally, for the salaried class, the contribution of both the employer and the assessee can be claimed as a tax deduction.

Apart from this, Section 80CCD is further divided into two subsections, i.e., Section 80CCD(1) and Section 80CCD(2). Section 80CCD(1) also has a sub-section called Section 80CCD(1B).

Further, if you opt for the old tax regime, taxpayers can claim deductions under Sections 80C, 80CCC, and 80CCD(1) up to the combined limit prescribed under the Income Tax Act, along with an additional deduction of up to INR 50,000 under Section 80CCD(1B).

Confused, let's take a quick overview of it through the table below.

This was all about Section 80CCD of the Income Tax Act, 1961. Moving further, let's know the eligibility criteria to claim NPS tax deduction under this section.

Eligibility for Section 80CCD

The eligibility criteria for claiming tax deductions u/s 80CCD are as follows

• Indian citizens
• Non-Resident Indians (NRIs)
• Salaried taxpayers (both government and private sector) and self employed individulas opting for NPS
• Individuals aged between 18 and 70 years can only opt for NPS schemes
• Atal Pension Yojana is available for individuals aged 18 to 40 years.

Additionally, under section 80CCD, you can also claim contributions made to NPS Vatsalya and Unified Pension Scheme.

So, these are the individuals, along with the age criteria, who can claim tax deduction under 80CCD of the Income Tax Act, 1961. Moving further, now let's know the tax deductions available under this section.

Tax Deductions Available Under Section 80CCD

The NPS tax deduction under section 80CCD can be classified into two types:

• Section 80CCD(1): Taxpayer's own contribution to NPS
• Section 80CCD(1B): Additional tax deduction on the taxpayer's contribution to NPS
• Section 80CCD(2): Employer's contribution to NPS

Let's know about these in more detail.

Section 80CCD(1): Deduction on Assessee's Own Contribution to NPS

nder Section 80CCD(1), deduction is available on the assessee's contribution to NPS, subject to the prescribed percentage limits and the overall deduction limit applicable under Sections 80C, 80CCC, and 80CCD(1). It is a combined tax deduction limit under sections 80C, 80CCC, and 80CCD(1). For instance, through EPF, PPF, and ELSS contributions, under section 80C, if you have already claimed the deduction of INR 1.5 lakh, you cannot claim NPS tax benefits under section 80CCD(1).

You can only claim a deduction on contributions made to the Tier-1 Account. Considering this, the tax deduction limits available under section 80CCD(1) are as follows:

Section 80CCD(1B): Additional NPS Tax Deduction of INR 50,000

Section 80CCD(1B) provides taxpayers with an additional tax deduction of up to INR 50,000 over and above the INR 1,05,000 limit. Considering this, under this section, you can claim up to INR 2,00,000 on your own contribution to the scheme.

This additional tax deduction is available to both salaried and self-employed individuals. As its name states, this section applies only to your contribution to the NPS Tier I- employer contribution is not included here.

Section 80CCD(2): Tax Deduction on Employer's NPS Contribution

Under the old and new tax regimes, the section 80CCD(2) tax deduction limit is different. Under the old tax regime, the contribution limit for a private sector employee is 10% and for government employees is 14%. In contrast, under the new tax regime, the employer's NPS contribution is up to 14%.

Since only the employer's contribution is allowed under section 80CCD(2), self-employed individuals cannot claim tax deductions under this scheme.

To provide you with a clear idea, here is a tabular summary of the section 80CCD(2) tax deduction limit under both regimes.

Further, as mentioned earlier, section 80CCD(1) and section 80CCD(1B) are only available under the old tax regime. So when claiming NPS tax deduction under section 80CCD, wisely choose the tax regime.

Moving forward, let's know the pension schemes covered under Section 80CCD. 

Pension Scheme Covered Under Section 80CCD

Pension Scheme covered under section 80CCD of the Income Tax Act, 1961 are as follows:

National Pension Scheme

The National Pension Scheme (NPS) is a long-term voluntary retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Under this scheme, there are types of accounts, i.e., NPS Tier-I and Tier-II accounts. 

• Tier-I Account: It is the primary pension account. Under this account, contributions are locked till your retirement age, i.e., 60 years, with limited partial withdrawal options. This account type is eligible for claiming tax deductions under Section 80CCD. 
• Tier-II Account: It is a voluntary savings account with no lock-in. Further, under specific conditions, except for the central government employees, the tax deductions are not available for this account.

Atal Pension Scheme

This scheme was launched by the Indian government to provide financial security to the vulnerable sections of society. Indian citizens between 18 and 40 years of age can opt for the Atal Pension Scheme. Fresh enrollment under APY is not available to NRIs. Existing APY subscribers who subsequently become NRIs must comply with the applicable regulatory guidelines. Considering this, existing APY account holders who become NRIs may need to close their accounts. To get a clear idea of this, it is advisable to check the PFRDA guidelines.

The minimum contribution under this scheme depends on the age of the account holder. For instance, for 18-year-old account holders, the contribution starts from Rs. 42. Additionally, contributions to the APY qualify for tax deduction under section 80CCD(1). It has the same limits and conditions as NPS Tier-I contributions. Further, this scheme also comes with the INR 1,05,000 limit under section 80CCD.

Unified Pension Scheme

The Unified Pension Scheme was launched by the Central Government in 2024. It is an option under the National Pension Scheme. It provides a guaranteed return to the assessee, adjusting to inflation. Hence, it addresses the return uncertainties of NPS. Additionally, the existing pension account holders of NPS also have the option to convert to the Unified Pension Scheme.

NPS Vatsalya

The NPS Vatsalya scheme aims to secure the future of children financially. Under this scheme, the account is opened by the minors and operated by the parents or guardians. After the child turns 18, they can partially withdraw the invested amount.

These are the different types of pension schemes covered under Section 80CCD of the Income Tax Act. Moving ahead, let's know the terms and conditions for claiming deductions under this section.

Terms and Conditions for Claiming Deductions Under Section 80CCD of the Income Tax Act

The terms and conditions for claiming deductions under section 80CCD of the Income Tax Act are as follows:

• Eligibility: Both salaried and self-employed individuals can claim tax deductions under Section 80CCD. For government employees, it is mandatory to participate in this scheme, while for other individuals, it is voluntary.
• Maximum Tax Deduction: Deductions under Section 80CCD(1) and the additional deduction under Section 80CCD(1B) are available subject to the applicable limits and conditions prescribed under the Income Tax Act. This includes the additional deduction of INR 50,000 available under section 80CCD(1B).
• Tax Benefits: Deductions under Section 80CCD(1), Section 80C, and Section 80CCC can be claimed together, subject to the overall deduction limit prescribed under the Income Tax Act. The deductions are available subject to the limits prescribed under the applicable provisions of the Income Tax Act, including Sections 80CCE and 80CCD(1B).
• Taxation on Withdrawals: Amount received from the NPS as monthly payments or surrendered accounts will be taxed as per applicable tax provisions.
• Reinvestment in Annuity Plan: If you reinvest the amount received from the NPS in an annuity plan, it is exempt from tax.
• Claiming Tax Deductions: When filing your tax returns at the end of the financial year, you can claim the tax deductions for NPS, APY, and your employer's NPS contribution.

Keep the mentioned terms and conditions in your mind while claiming tax deductions under this section. Moving further, let's know the key considerations for NRI tax deduction under section 80CCD of the Income Tax Act, 1961.

Key Considerations for NRIs Claiming Deductions Under Section 80CCD

As mentioned earlier, like residents, NRIs can also open and contribute to NPS accounts in India. However, they face certain conditions and limitations in the NPS scheme that differ from those of Indian resident contributors. These are as follows:

NRI NPS Eligibility

NRIs aged between 18 and 70 years can open an NPS Tier-I account. The NPS account should be opened or operated through a Point of Presence (PoP) registered with PFRDA. Additionally, contributions should be made using an NRE or NRO account or through normal banking channels from overseas.

Tax Deduction Availability for NRIs

NRIs with taxable income in India, such as salary from an Indian employer, capital gains, rental income, or business income, can claim a tax deduction under Section 80CCD against their Indian income. Considering this, NRIs with no taxable income in India cannot claim tax deductions under this section. Confused, let's better understand with an example.

FEMA Considerations

NPS contributions and withdrawals include cross-border money movement for NRIs. Although contributions to NPS from overseas are generally permitted, for fund repatriation to an overseas account at the time of maturity, you need to follow FEMA guidelines. Considering this, before making large NPS contributions, confirm the current repatriation rules with your FEMA advisor or bank.

On Returning to India

NRIs who returned to India and again became Indian residents can continue their NPS account without any issue. The deduction benefits under section 80CCD of the Income Tax Act continue to apply once they have taxable income in India.

So, being an NRI, keep the mentioned things in your mind while investing in the NPS scheme and enjoy the NPS tax benefits.

Final Thoughts

Lastly, Section 80CCD is an important thing in retirement planning and tax management in India, specifically when you use all three sub-sections strategically. For NRIs, when claiming tax benefits under this section, ensure you have a taxable income in India.

Further, want to increase your tax savings under section 80CCD? From tax planning to claiming tax deduction and notice assistance, at Savetaxs, we offer complete NRI taxation services. So, connect with us, simplify your tax journey in India.