Section 80 CCD Deductions for NPS

05 December, 2023

National Pension Scheme (NPS) is a government-sponsored retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). You can invest a fixed amount throughout your working life and systematically build a significant retirement corpus. You can choose between equity and fixed-income instruments for corpus creation.

Besides wealth creation, an NPS investment helps you save significantly on taxes every financial year. You can claim tax deductions under Section 80C and Section 80 CCD of the Income Tax Act, 1961. You can claim ₹1.5 lakh tax deduction under Section 80 CCE. Note that tax benefits under NPS are applicable to Tier 1 accounts.

Read on to know tax deductions under Section 80 CCD.

Section 80 CCD & NPS

Section 80 CCD deductions are classified into two subsections – Section 80 CCD (1) and Section 80 CCD (1B).

1. Section 80 CCD (1)
   
   Section 80 CCD (1) defines tax deductions that all NPS subscribers can enjoy, whether you are a private sector employee, government employee, or a self-employed professional. Following are key pointers about tax deductions:
   
   

• As a salaried individual, you are eligible for a maximum tax deduction of 10% of your salary (basic + daily allowance).
  
  

• As a self-employed NPS subscriber, you can avail a maximum deduction of 20% of your gross income.
  
  Note the Section 80 CCD (1) tax deductions cannot exceed ₹1.5 lakh limit per Section 80 CCE.
  
  

2. Section 80 CCD (1B)
   
   Section 80 CCD (1B) defines tax deductions on additional contributions to NPS. You can avail tax deductions on an additional contribution of ₹50,000 to your NPS Account. This is beyond the Section 80 C ₹1.5 lakh limit.
   
   

3. Section 80 CCD (2)
   
   Section 80 CCD (2) defines tax deductions that an employer can claim on NPS contributions. Following are critical pointers about tax deductions you should make note of:
   
   

• An employer can make a less than, equal to, or higher value contribution than any employee contribution.

• A central or state government employer can claim a tax deduction of 14% of the employee's salary.

• Any other employer can claim a tax deduction of 10% of the employee's salary.

• An employee can claim the tax deduction by classifying his contribution as a business expense in the profit and loss account of the financial year.
  
  

4. Section 80 CCD (5)
   
   Tax exemption will be applicable on purchase of annuity upon attaining 60 years of age or superannuation.
   
   

Important notes

Section 80 CCD income tax deductions are subjected to the following conditions:

• Section 80 C and Section 80 CCD (1B) offer a tax deduction limit of ₹1.5 lakh and ₹50,000. You enjoy a combined tax deduction limit of ₹2 lakh.

• You cannot claim tax deductions made under Section 80 CCD again under Section 80 C. This means that the total deduction under Section 80C and 80CCD cannot exceed ₹2 lakh.

• NPS monthly payments and surrendered accounts will be taxed according to the applicable tax provisions.

• NPS corpus amount reinvested in an annuity is entirely tax-exempt but annuity income is taxable.

• You can claim Section 80 C and Section 80 CCD tax deductions during the Income Tax Return (ITR) filing at the end of every financial year. You must submit proof of investment to support your tax deduction claims.
  
  

About NPS

NPS extends to two investment options – auto and active. In the auto option, your deposit amount gets invested in all available assets. It adopts the life cycle-based approach to modify the Equity exposure. It is suitable for know-nothing and passive investors.

In the active option, you decide the asset mix and, subsequently, its corpus allocation. However, the Equity investment has a limit of 75%. You must consider your retirement savings goal and risk appetite to make a suitable investment.

There are two NPS Accounts – Tier 1 and Tier 2. Opening a Tier 1 account is mandatory to join NPS. It is locked in until you attain 60 years of age, and withdrawals from it are conditional. Only Tier 1 account holders can open a Tier 2 account. Tier 2 account is a voluntary account with no lock-in period, flexible withdrawals, and exit rules.

Conclusion

NPS is an incredible retirement savings scheme offering the dual benefit of wealth creation and tax efficiency. You should consider opening an NPS account as soon as possible. With time, you can save a significant amount of your monthly income and build a sizeable corpus. You can open an NPS account via HDFC Bank in a matter of minutes!


​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.