Contribution to National Pension Scheme (NPS) is one of the safe and popular scheme to save your taxes. While filing income tax return, you could claim deduction under section 80CCD if you made any investments in National Pension Scheme. National Pension Scheme is a notified scheme issued by the Central government.
What is section 80CCD?
Under section 80CCD you can claim deduction against amount contributed by you or your employer in National Pension Scheme. Only individuals are eligible to claim deduction under section 80CCD against the contributions made to National Pension Scheme (NPS) or Atal Pension Yojana (APY).
What is National Pension Scheme?
The government introduced NPS to give benefit to individuals to create a retirement corpus and receive a fixed monthly pay-out to help them lead a comfortable life post-retirement. Earlier, this scheme was available to only government employees but later was available for private sector as well.
Following are few major highlights of the NPS:
(i) One may contribute to NPS until the age of 60 years. This provision is mandatory for employees of Central Government and for other individuals it is voluntary.
(ii)You can choose from various investment options like Equity funds, Government bonds, Government securities, etc.
(iii) Partial withdrawals is allowed up to 25% of the contribution made by an individual, subject to certain conditions.
(iv) Individuals can withdraw up to 60% of the corpus as a lump-sum pay-out and must invest the remaining 40% in an annuity plan.
(v) To be eligible for Income Tax deduction under the NPS Tier 1 Account, one must contribute a minimum of Rs. 6,000 per annum or Rs. 500 per month.
(vi) To be eligible for Income Tax deduction under the NPS Tier 2 Account, one must contribute a minimum of Rs. 2,000 per annum or Rs. 250 per month.
(vii) It is one of the cheapest equity-linked investment options in the market.
Classification of Section 80CCD
Section 80 CCD is divided into two subsections i.e. section 80CCD (1) & section 80CCD (2). Individual can claim deduction under these sections against contribution made by himself and employer if any.
Section 80CCD (1):
Section 80 CCD (1) defines the provisions regarding Income Tax deduction available to individuals for contributions made to NPS. This deduction can be claimed either by a government employee or private employee or a self-employed individual. The Indian citizen between the age of 18 to 60 years can claim deduction under this section.
Maximum Permissible Deduction:
The maximum deduction you can claim under this section is lowest of the following;
· 10% of the Basic Salary + D.A. in the previous year (in case taxpayer is an employee) Or
· 20% of the Basic Salary + D.A. in the previous year (in case taxpayer is self-employed) Or
Under Section 80 CCD (1B), you can claim additional deduction of Rs 50,000. This is available to both salaried as well as self-employed individuals. Henceforth, you can claim maximum deduction of Rs 2,00,000.
· 2,00,000 = Section 80CCD (1):1,50,000 + Section 80CCD(1B): 50,000
· The deduction available under section 80CCD(1B) is an over and above deduction available under section 80CCD (1). The deduction available under section 80 CCD (1) is within purview of section 80C, hence maximum deduction can be claimed is Rs 1,50,000.
Section 80CCD (2)
Under this section you can claim deduction against the amount contributed by employer in the National Pension Scheme (NPS) on behalf of you. This deduction is allowed to only salaried individuals and self-employed individuals are not eligible for the same.
Maximum Permissible Deduction:
Under this section, salaried individuals can claim deduction upto 10% of basic salary plus dearness allowance.
NPS with its tax benefits can help you to reduce your tax liability in an efficient way.You can create a good retirement corpus amount which will ensure smooth flow of income at old age. You can consider this Investment option to avail tax benefits and to receive fine returns in future.