Deductions under Section 80 CCD(1B) of income tax

According to the norms and regulations of the Income Tax Act of 1961, every Indian citizen who owes income tax must pay that tax. However, this does not imply that you must pay taxes on all of your income in a given fiscal year. The Income Tax Act contains several rules that let you deduct certain investments and costs from your taxes. You can significantly reduce your tax obligations and establish a second source of income for yourself by carefully planning your taxes.

These deductions give you substantial advantages by providing you with the dual benefits of tax reduction and income generation. You must keep a careful eye on any new deductions or adjustments that the government occasionally makes. One of the tax deductions offered by the Income Tax Act is covered under the NPS income tax section. You can claim certain tax deductions related to the contributions made to the NPS under Section 80 CCD (1B). Read on to learn more about this deduction.

See also: National Pension System: All about NPS

What is NPS?

The National Pension System, also known as NPS, is a pension programme open to both public and private sector individuals. It is one of the most popular solutions for people looking to establish a corpus for their retirement as well as a consistent monthly income.

The funds that are placed into NPS are invested in a range of equities and financial instruments, including the stock market. It is frequently cited as one of the least expensive equity-exposed investing options. There is no assurance of a specific amount because returns are closely correlated with market performance, but over time, NPS returns are among the greatest in the market.

See also: Taxation of jointly owned property

NPS income tax section: What is Section 80CCD(1B)?

Section 80CCD of the Income Tax Act, 1961, addresses the deductions that are available to people who make NPS contributions. Up till 2015, an individual was qualified to claim an income tax deduction of up to Rs 1 lakh against the contributions made to the NPS under Section 80CCD. The Indian government increased the deduction cap to Rs 1.5 lakh annually from the fiscal year of 2015 onward.

A new sub-section 1B was additionally included to provide an extra deduction of up to Rs 50,000 for NPS payments paid by individual taxpayers. Over and above the benefit of Rs 1.5 lakh available as a deduction under Sec 80CCD, an additional deduction of Rs 50,000 under Section 80CCD(1B) is available for evaluation (1).

Hereby, by combining Section 80CCD(1) and Section 80CCD, the maximum exemption amount is increased to Rs 2 lakh (1B).

How is investing in NPS done to avail of tax benefits?

NPS has two different account types of accounts: Tier 1 and Tier 2.

NPS Tier 1 account

This has a predetermined lock-in duration of up until the subscriber turns 60 years old. Under certain restrictions, only partial withdrawal is permitted. Tax deductions are available for contributions made to Tier 1 under Section 80CCD(1) and Section 80CCD (1B). This means that you can invest in an NPS Tier 1 account of up to Rs 2 lakh and claim a deduction for the entire amount, i.e., Rs 1.5 lakh under Section 80CCD(1) and Rs 50,000 under Section 80CCD (1B).

NPS Tier 2 account

This is a voluntary savings account that allows users to withdraw money whenever they choose. However, a tax deduction cannot be claimed for a Tier 2 account contribution. You must first open a Tier 1 account before you can open a Tier 2 account. The amount paid to NPS, the income received, and the amount of maturity are all tax-exempt under the exempt-exempt-exempt (EEE) system of taxation, which is presently applicable. The most recent criteria states that upon maturity, you may withdraw up to 60% of the principal but must reinvest the remaining 40% to buy an annuity that will pay you a fixed monthly income.

NPS income tax section: Tax benefits under NPS

The employee and employer contributions to the National Pension System are eligible for a tax exemption of Rs 1.5 lakh (NPS). Under Sections 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act, tax benefits may be claimed.

1. Section 80CCD (1): This clause allows private, public, or self-employed people who contribute to the NPS or APY scheme to obtain a tax deduction of Rs 1.5 lakh in a fiscal year. Employees in the private and public sectors are eligible to deduct 10% of their wage contributions, while self-employed people are eligible to deduct 20% of their gross income.
2. Section 80CCD (1B): Taxpayers may claim an additional Rs 50,000 under this subsection if the contribution exceeds the permissible amount as specified in Section 80CCD (1).
3. Section 80CCD (2): The employer’s contribution to an employee’s NPS funds is covered in this section. This sum may be deducted by employees under Section 80CCD (2). For employees in the private sector, the deduction is limited to 10% of the employee’s income plus the dearness allowance, while it is 14% for those who work for the government.

NPS income tax section: Benefits for existing NPS subscribers

Along with the deduction of Rs 1.5 lakh under Section 80C, current NPS subscribers may additionally benefit from the deduction under Section 80CCD(1B). They may deduct an extra Rs 50,000 from their contribution under Section 80CCD (1B). They can split their NPS contribution into two claims, one in Section 80C and the other in Section 80CCD(1B), to maximise their tax deduction of Rs 2 lakh.

NPS income tax section: Eligibility for deductions

The requirements for claiming tax deductions under Section 80CCD are as follows:

• Any Indian resident contributing to the NPS or the APY must be at least 18 years old.
• Any salaried person is eligible to make a deduction.
• A person should not be a member of a Hindu Undivided Family (HUF).

Documents required for claiming deductions

• PAN card
• Aadhaar card
• Bank account statement

FAQs