Section 80CCD

Section 80CCD of the Income Tax Act, 1961 allows Income Tax deductions to individual tax assessee on the contribution made towards the notified pension schemes from the Central Government that is also known as New Pension scheme.

The contribution made by the employer on behalf of the employee towards the NPS is also part of the same section according to the rules of the Income Tax Act.

NPS Tier 1

Investing in this is making retirement planning done to create a retirement corpus. This investment is meant for the long term and restricts withdrawal. When the maturity period ends, at that time, 40% of the investment corpus must be converted into an annuity and rest 60% can be withdrawn.

NPS Tier 2: 

This investment meant for medium- or short-term needs. It is a voluntarily account. Only Tier 1 investors can invest in this. There are no restrictions on the withdrawal also.

Overview of the National Pension Scheme (NPS)

• National Pension Scheme is a savings scheme promoted by the Government of India to build a retirement corpus for Indian citizens.
• It’s a mandatory subscription for central government employees.
• Other than the central government employees, others can also make contribution in the National Pension Scheme voluntarily.
• Contribution must be made continuously till the age of 60 years.
• Rs. 6000 is the minimum amount contribution for Tier I account of the National Pension Scheme.
• It offers you different types of investments to choose from like Government securities, equity funds and fixed income bearing instruments. However, equity allocation cannot be more than 50%.
• It’s a market-linked investment scheme which has a very little fund management cost.
• At the age of 60, you can withdraw up to 60% of the proceeds in a lump sum and the rest 40% must be converted to annuity plan.
• Deferred exit is also available as an option. However, 80% of the withdrawal proceeds must be put in the annuity.
• Partial withdrawals up to 25% is allowed only in certain specific cases based on the purpose of withdrawal.
• The main schemes of National Pension Schemes are State Government and Central Government pension schemes. However, from 2009 other employees can also invest in National Pension Scheme voluntarily. 

Below are some of the major banks and financial institutions that offer Pension Schemes:

Tax treatments of National investment scheme

Previously tax deductions allowed for NPS investments limited to only Rs 1 Lakh. It was amended in 2015 budget to encourage more people for investing in pension schemes. The limit of 1 lakh under Section 80CCD (1) was then increased to Rs 1.5 lakh as per sub-section 1A of Section 80CCD to provide an additional deduction of Rs 50,000 for contributions made by all the assessee regarding the new pension scheme.

And the additional Rs.50,000 deduction limit is over and above the deduction limit allowed under Section 80C of the Income Tax Act, 1961.

There are two sections under Section 80CCD based on which one can contribute to the National Pension Scheme. To claim tax deductions, it is a must to mention whether it is a self- contribution or made by the employer at the time of filing Income Tax Return. One needs to show the transaction statement as proof to claim income tax deductions.

Section 80CCD (1)

It allows tax deductions in those cases where taxpayers or assessee contributed to the National Pension Scheme as per the Income Tax Act 1961. The deductions made as per this section is available to both salaried individuals and self-employed people.

Below are the tax benefits available under Section 80CCD (1):

• The maximum tax deductions allowed is Rs. 1.5 lakh. This limit is inclusive of the Section 80C limit.
• In the case of a salaried individual, the maximum deduction cannot exceed 10% of his/her annual salary (Basic + Dearness Allowance).
• In the case of non-salaried individuals, the maximum deduction cannot exceed 10% of the gross total income for the particular financial year. However, this is applicable only for the financial year 2016-17 as the limit is increased to 20% from the financial year 2017-18 onwards.

Let’s understand this with an illustration. Let’s say Mr. Arun is a central government employee and he contributes Rs. 50,000 to his pension fund. His salary structure is as below:

Basic Salary – Rs 180,000

Dearness Allowance – Rs 80,000

Other allowances and Perquisites taxable = Rs 100,000

Investments under Section 80C- Rs 100,000

Now can claim only Rs 26000(10% of basic and dearness allowance under Section 80CCD (1)

Section 80CCD (2)

An employer is also allowed to contribute to the employee’s pension fund under the corporate model of the National Pension Scheme. There are three ways in which contribution is structured:

• An employer can contribute which is equal to the employee's contribution.
• Employers can also contribute lower or higher than that of the employee's contribution.
• Only employers can also contribute on behalf of an employee.
  

On a taxation front, both employee and employer can be benefitted from these contributions. Employers can claim a tax benefit by showing his part of contribution as a business expense in the profit and loss account. On the other hand, the employee can avail of a benefit of tax deduction in the case where the employer contributions in the new pension scheme, then that employee can claim a tax deduction for such contributions under Section 80CCD (2) of the Income Tax Act, 1961.

Maximum eligible amount of deduction is least of below three conditions: 

• Contribution made by employer towards pension scheme.
• 10 % of an individual’s annual salary (basic + dearness allowance).
• Gross total income

This eligible deduction is over and above the limit of Section 80C. Self-employed are not eligible for this deduction. It applies to only salaried individuals.

Section 80CCD (1B)

This is a new subsection added to encourage people to invest more in the National Pension scheme by giving an additional deduction benefit for contributions made by individual assessees whether it is salaried or self-employed up to limit of Rs 50,000.

Below are the tax benefits available under Section 80CCD (1B).

• This was the new section introduced after the amendments were introduced 2015 Union Budget.
• This section gives an additional tax benefit of up to Rs. 50,000 for the contributions made towards New Pension Scheme.
• Both salaried and non-salaried individuals can avail of this benefit under the Section.
• The allowed deduction is over and above the limit of Section 80CCD (1)

This is a more beneficial clause for individuals who fall under the higher tax bracket. Individuals who fall under a 30% tax bracket can save up to Rs. 15,000 and the ones who fall under 20% tax bracket can save around Rs. 10,000 by investing in the National Pension Scheme (NPS).

If an individual has savings or investments of Rs. 1,50,000 under Section 80C (excluding his contribution to National Pension Scheme), then he can show his contribution to the national pension scheme (NPS) under Section 80 CCD (1B) up to a maximum of Rs.50,000, which is over the 1.5 lakh limit allowed under Section 80C.

Eligibility to claim tax deduction under Section 80CCD

• According to the provisions under Section 80CCD of the Income Tax Act, 1961, tax deductions are allowed for the contributions made towards National Pension Scheme by an individual. Contributions made by the employer towards the National Pension scheme on behalf of employees are allowed for tax deductions.
• Contributions made by an employer towards the National Pension Scheme on behalf of employees are also allowed for tax deductions under this section.
• Deduction can be claimed up to the limit of Individuals 10% basic annual salary (basic + dearness allowance) or 10% of gross annual income (in case self-employed). Upper limit on the quantum of claim under Section 80CCD (1) and Section 80CCD (2) is up to 1.5 lakh.
• Additional deduction of Rs. 50,000 (over and above Rs. 1.5 lakh limit) is introduced in Section 80 CCD (1B) for any individual making a self-contribution towards National Pension Scheme. With this total deduction allowed amounts to Rs. 2 lakhs in a financial year.
• These deductions can be claimed at the time of filing the income tax return.
• Tax deductions under this section are available only to individuals and not to Hindu Undivided Families (HUFs)
• An individual claiming tax deduction under Section 80CCD can be both resident and non-resident of India.
• Any tax deductions claimed under Section 80CCD cannot be claimed under Section 80C.

Terms and condition to avail tax benefit under Section 80CCD

• For Self-employed individuals, the maximum limit is 10% of the gross annual income which is now increased to 20% (applicable from the next assessment year).
• Employees get eligibility to claim deductions for contributions made by the central government or employers which cannot be more than 10% of annual salary (basic + dearness allowance).
• Hence, the total tax deductions allowed for employees is Rs. 1.5 lakh (under section 80C, 80CCC, 80CCD) + Rs. 50,000 under Section 80CCD (1B) = Rs. 2 lakhs.

What are the Tax Implications on Withdrawal of National Pension Scheme (NPS) and Monthly?

• Withdrawal of funds from the National Pension Scheme is taxable as it follows the Exempt-Exempt-Taxed (EET) rule of taxation system. However, 40% of the maturity proceeds are exempt from the income tax.
• Income Tax is not applicable on the balance that is reinvested in the annuity plan. However, monthly pensions received out of the annuity will be subjected to income tax based on the individual's tax slab.
• To sum it up, tax considerations are one of the critical parts of any investment. NPS is one of the best retirements saving product. It comes with a 'high safety' ranking. With an additional deduction limit of Rs. 50,000 over and above the limit of Section 80C, investment in the National Pension Plan can save a considerable amount of tax for those who fall under a higher tax bracket.
• The total tax deductions allowance for employees is up to Rs 1.5 Lakhs according to Section 80C, 80CCC or     80CCD in addition to Rs 50,000 as per Section 80CCD(1B) which is equal to Rs 2 Lakh.
  

National Pension Schemes Tax Treatment