Deductions Under Section 80CCD(1B)

Section 80CCD(1B) allows an additional Rs. 50,000 tax deduction for NPS (Tier I) contributions beyond the Rs. 1.5 lakh limit under Section 80C. It is available to all individual taxpayers (salaried/self-employed) with no age restriction. This deduction applies to both employee and voluntary NPS contributions and can be claimed along with 80CCD(1) benefits.
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Deductions Under Section 80CCD(1B)
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2 min read
21-April-2025

Section 80CCD(1B) of the Income Tax Act offers individual taxpayers an extra tax deduction of up to Rs. 50,000 for contributions made to the National Pension System (NPS). This deduction is available over and above the Rs. 1.5 lakh limit already allowed under Section 80C and Section 80CCD(1). However, it’s important to note that this additional deduction is only available under the old tax regime and not under the new system introduced under Section 115BAC. When combined, taxpayers can claim up to Rs. 2 lakhs in total by utilising the deductions available under Sections 80C, 80CCD(1), and 80CCD(1B), thereby reducing their taxable income more effectively while saving for retirement.

Budget 2025: Investment in NPS Vatsalya to get tax benefit of up to Rs 50,000

In her Budget 2025 speech, Finance Minister Nirmala Sitharaman announced a welcome move for NPS Vatsalya subscribers. Individuals investing in this version of the pension scheme can now claim a tax deduction of up to Rs. 50,000 annually under Section 80CCD(1B), just like those in the regular NPS scheme. This is in addition to the Rs. 1.5 lakh deduction allowed under Section 80C. The proposal also covers Sections 12(B) and 80CCD(3), offering a wider scope of tax exemptions. The intent is to enhance the appeal of NPS Vatsalya, especially for parents saving on behalf of minors, and provide parity in tax treatment between NPS and NPS Vatsalya subscribers.

What is Section 80CCD(1B)

Section 80CCD(1B) gives taxpayers an additional tax deduction of up to Rs. 50,000 for voluntary contributions to the National Pension System (NPS). This benefit is over and above the existing Rs. 1.5 lakh deduction available under Section 80CCD(1) and Section 80C. Together, taxpayers can reduce their taxable income by up to Rs. 2 lakhs if they invest accordingly under the old tax regime.

The Rs. 50,000 deduction under Section 80CCD(1B) is separate from deductions under Section 80C and 80CCC. You may claim:

  • Up to Rs. 1.5 lakh under 80C + 80CCC + 80CCD(1), and
  • An additional Rs. 50,000 under Section 80CCD(1B)

For instance, suppose you invest Rs. 1.5 lakh in PPF, ELSS, or tax-saver FDs (eligible under Section 80C). You also contribute Rs. 50,000 towards your NPS account. In this case, you can claim the entire Rs. 2 lakhs as a deduction from your taxable income.

Deduction under Section 80CCD

Taxpayers contributing to NPS can claim deductions under various sub-sections of Section 80CCD. Here’s a breakdown:

  • Section 80CCD(1) allows individual salaried employees to claim a deduction for up to 10% of their salary (basic + dearness allowance) towards NPS.
  • Section 80CCD(1B) permits an additional deduction of up to Rs. 50,000 for self-contributions to NPS, on top of the 80CCD(1) limit.
  • Section 80CCD(2) relates to employer contributions. It allows employees to claim a deduction for employer’s contributions up to 14% for central government employees and 10% for others. This is separate from the Rs. 2 lakh limit of 80C, 80CCD(1), and 80CCD(1B).

Taxpayers can strategically split their contributions to maximise tax benefits. For instance, they may invest part of their funds under 80C and the remaining under 80CCD(1B) to take full advantage of the Rs. 2 lakh deduction limit available under the old regime.

The table below outlines the NPS tax benefits:

Section

Type of contribution

Maximum deduction

Notes

80C

LIC, PPF, ELSS, FDs, NPS, etc.

Rs. 1.5 lakhs

Combined with 80CCC and 80CCD(1), capped at Rs. 1.5 lakhs

80CCC

Pension fund contributions

Included in above limit

80CCD(1)

Self-contribution to NPS (10% of salary)

Included in above limit

80CCD(1B)

Extra self-contribution to NPS

Rs. 50,000

Over and above the Rs. 1.5 lakh limit

80CCD(2)

Employer contribution

14% of salary (central government employer)

10% of Salary (other employers)

Deduction allowed separately, outside of 80C and 80CCD(1B) limits.

 

Eligibility under Section 80CCD(1B)

To claim deduction under Section 80CCD(1B), the following conditions must be met:

  • You must be filing under the old tax regime, not the new one.
  • You should be contributing to an NPS Tier I account.

Eligibility to open an NPS account is as follows:

  • Resident individuals aged between 18 and 70 years
  • Non-Resident Indians (NRIs) aged 18 to 70 years can also invest, but if their citizenship changes, the account will be closed.
  • Minors below the age of 18 can invest through NPS Vatsalya, and their parents/guardians can still claim deductions under 80CCD(1B).

It’s important to note that if both you and your employer contribute to NPS, you can benefit from multiple deductions – Section 80CCD(1), Section 80CCD(1B), and Section 80CCD(2) – under the old tax regime. However, under the new regime, only the employer’s contribution under 80CCD(2) is deductible.

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What is NPS?

The National Pension Scheme (NPS) is a voluntary, long-term retirement savings scheme designed to enable systematic savings for retirement. Administered by the Pension Fund Regulatory and Development Authority (PFRDA), NPS aims to provide financial security during the post-employment phase of an individual's life.

Types of NPS accounts

The National Pension Scheme (NPS) in India offers two distinct types of accounts, each catering to different financial needs and preferences. Understanding the features of these accounts is crucial for individuals planning their retirement savings. Here are the two types of NPS accounts:

1. Tier I account:

  • Long-term savings: The Tier I NPS account is primarily designed for long-term retirement savings. It comes with certain restrictions on withdrawals to ensure that subscribers accumulate a substantial corpus for their post-employment years.
  • Withdrawal restrictions: withdrawals from the Tier I account are allowed only under specific conditions, such as reaching the age of 60 (superannuation) or in the case of certain critical illnesses. Premature withdrawals are limited and may incur penalties.
  • Compulsory annuity purchase: Upon retirement, a subscriber must utilise at least 40% of the accumulated corpus to purchase an annuity, which provides a regular pension. The remaining 60% can be withdrawn as a lump sum or in phased installments.

2. Tier II account:

  • Voluntary savings with liquidity: The Tier II NPS account offers more flexibility compared to the Tier I account. It serves as a voluntary savings option with no rigid withdrawal restrictions, providing subscribers with liquidity and accessibility to their funds.
  • No annuity requirement: Unlike the Tier I account, there is no compulsory annuity purchase requirement for withdrawals from the Tier II account. Subscribers can withdraw the entire corpus as a lump sum without purchasing an annuity.
  • Operational simplicity: The Tier II account operates as an add-on to the Tier I account, making it easier for subscribers to manage both accounts through a single Permanent Retirement Account Number (PRAN).
  • Minimum contribution requirements: While the Tier I account has minimum annual contribution requirements, the Tier II account allows subscribers to start with a lower initial investment and contribute as per their financial capacity.

Which is the pension fund scheme?

The eligible pension scheme referred to under Section 80CCD(1B) is the National Pension System (NPS). This is a government-approved retirement savings plan designed to help individuals build a retirement corpus through regular contributions. NPS allows tax deductions under several sections of the Income Tax Act and offers flexibility in investment choices, including equity and debt funds. The scheme is open to salaried employees, self-employed individuals, and even NRIs, making it a popular long-term investment option for retirement planning.

How does this scheme work?

Contribution

Once you’ve opened an NPS account, you need to make regular contributions to keep it active. Here are the key requirements:

  • The minimum annual contribution must be at least Rs. 1,000
  • Each individual contribution must be Rs. 500 or more
  • You must make at least one contribution per year

You can continue contributing to your NPS account until you turn 60. During this time, your investments are managed in a mix of equity, government securities, and corporate bonds.

Investment choices

You can choose how your money is invested in two ways:

1. Active choice
This option allows you to decide how your money is split between different asset classes like equity and debt.

  • You can change the allocation as per your preference until the age of 50.
  • A maximum of 75% of your investment can be in equities.
  • After 50, the equity cap reduces by 2.5% each year.

2. Auto choice
Here, the system automatically manages your asset allocation based on your age.
There are three auto modes:

· Aggressive Life Cycle Mode – Higher equity allocation in early years

· Moderate Life Cycle Mode – Balanced mix of equity and debt

· Conservative Life Cycle Mode – Lower equity, higher debt for safer returns

As you grow older, the proportion of equity investments gradually reduces and debt increases, reducing the risk level accordingly.

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How to invest in NPS to avail tax benefits

To avail of tax benefits under Section 80CCD(1B), individuals can contribute to their NPS accounts. The contributions can be made through various mediums such as the employer, online platforms, or directly through Points of Presence (POPs) registered with NPS.

Things to note while claiming deductions under Section 80CCD(1B)

While claiming deductions under Section 80CCD(1B), individuals should ensure compliance with the prescribed limits and conditions. It is essential to contribute within the permissible limit to maximise the available deduction.

Documents required to claim tax benefit under NPS

When claiming tax benefits under the National Pension Scheme (NPS), individuals need to provide specific documents to support their contributions and adhere to tax regulations. Here is a concise list of essential documents:

1. NPS contribution statement:

Issued by the pension fund manager, this statement details contribution made by the subscriber and employer during the financial year.

2. PRAN card (Permanent Retirement Account Number):

The unique identification number assigned to NPS subscribers is crucial for verifying contributions and withdrawals.

3. Payment receipts or bank statements:

Evidence of NPS contributions, provided through bank statements or payment receipts, serving as proof of actual payments.

4. Form 16 (for salaried individuals):

For salaried individuals, Form 16 verifies employer contributions to NPS and details salary components.

5. Self-assessment challan or ITR acknowledgement:

Proof of claiming NPS deductions when filing an Income Tax Return is essential for verification.

6. Nomination details:

While not directly related to tax claims, updated nomination details are crucial for effective NPS account management.

7. KYC documents:

Basic Know Your Customer (KYC) documents, including Aadhaar Card, PAN card, and address proof, required for NPS account opening.

What are the withdrawal criteria under the NPS scheme?

1. Retirement age: At the age of 60, up to 60% of the corpus can be withdrawn as a lump sum, with the remaining 40% mandatorily used to purchase an annuity.

2. Premature exit: Before the age of 60, up to 20% of the corpus can be withdrawn, and 80% must be used to buy an annuity.

3. Partial withdrawals: Allowed after 3 years of account opening, up to 25% of the contributions can be withdrawn for specific purposes like higher education, marriage, home purchase, or medical emergencies.

4. Death of subscriber: Entire accumulated pension wealth is paid to the nominee/legal heir without mandatory annuitisation.

Taxation on NPS withdrawal

Withdrawal type

Tax-exempt limit

Partial withdrawals

Up to 25% of contributions are tax-free

Account closure / opting out early

Up to 40% of the contributions made is exempt

Withdrawal at age 60

Up to 60% of the contributions made is exempt. The remaining 40% (at age 60) is also exempt if invested in an annuity plan

Withdrawal at age 70

Fully exempt from tax


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Other topics you might find interesting

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Section 80ccd 2 of Income Tax Act

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Section 80dd of Income Tax Act

Section 80e of Income Tax Act

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Section 80ddb of Income Tax Act

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Benefits for existing NPS subscribers under Section 80CCD

Existing National Pension Scheme (NPS) contributors stand to gain substantial advantages under Section 80CCD(1B) of the Income Tax Act. Here is a concise overview of the benefits for those who have been actively participating in the NPS:

1. Additional deductions: Subscribers enjoy an extra deduction beyond Section 80C limits, providing a unique avenue for reducing taxable income.

2. Enhanced tax savings: This provision allows existing NPS contributors to optimise tax savings, offering an attractive proposition for lowering overall tax liability.

3. Flexibility in contribution: Existing subscribers can voluntarily increase contributions, maximising both deductions and long-term retirement savings.

4. Long-term wealth accumulation: Additional deductions foster long-term wealth accumulation, supporting financial security during retirement.

5. Tailored retirement planning: Section 80CCD(1B) enables strategic contributions, empowering subscribers to align their savings with specific retirement goals.

6. Continuity of tax benefits: Acknowledging and rewarding commitment, the provision ensures a continuous stream of tax benefits for existing NPS contributors.

Encouragement for long-term commitment: By offering extra deductions, Section 80CCD(1B) motivates NPS subscribers to maintain a long-term commitment to retirement savings.

Other types of 80CCD deductions

Section 80CCD(1): For individuals

This sub-section allows employees and self-employed individuals to claim a tax deduction for their contributions to NPS or the Atal Pension Yojana (APY).
Key points:

· Employees (in both public and private sectors) can claim up to 10% of salary (basic + dearness allowance).

· Self-employed individuals can claim up to 20% of their gross income.

· The combined deduction limit under Sections 80C, 80CCC, and 80CCD(1) is Rs. 1.5 lakh.

Section 80CCD(2): For employer contributions

This applies only to salaried employees and offers a deduction for contributions made by their employer to their NPS account.

· Central government employees can claim up to 14% of salary (basic + DA)

· Other employees can claim up to 10% of salary (basic + DA)

· There is no upper ceiling, and this deduction is available under both old and new tax regimes

Employer contributions are not counted within the Rs. 1.5 lakh overall deduction limit, making this a valuable additional benefit for salaried individuals.

In conclusion, Section 80CCD(1B) of the Income Tax Act offers an excellent avenue for individuals to secure their retirement while enjoying tax benefits. By understanding the provisions and following the necessary steps, taxpayers can make the most of this opportunity and build a robust financial future.

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Frequently asked questions

Is the National Pension Scheme regulated?

Yes, the National Pension Scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and safeguarding the interests of investors.

Can every person claim a deduction under Section 80CCD(1b)?

Yes, every individual, irrespective of their employment status, can claim a deduction under Section 80CCD(1B) by contributing to the National Pension Scheme.

Is 80CCD included in 80C?

Yes, Section 80CCD(1) contributions for NPS are included in the Rs. 1.5 lakh limit under Section 80C, but Section 80CCD(1B) provides an additional deduction of Rs. 50,000 specifically for NPS investments.

Is it possible for anyone to claim a deduction under Section 80CCD (1B)?

Only individuals who have invested in the National Pension Scheme (NPS) or Atal Pension Yojana (APY) can claim a deduction under Section 80CCD (1B).

Can I claim both 80C and 80CCD?

Yes, you can claim both 80C and 80CCD deductions. Contributions toward NPS can be claimed under 80CCD(1B), over and above the 80C limit.

Can I split my NPS contribution in 80CCD(1) and 80CCD(1B)?

Yes, you can. Section 80CCD(1) allows a deduction of up to Rs. 1.5 lakh for your own contributions to NPS. Section 80CCD(1B) allows an extra deduction of up to Rs. 50,000. However, the same contribution cannot be claimed under both sections, so your investments must be clearly divided to avail both deductions.

Can I stop my NPS contribution after 1 year?

Technically, you may stop contributions, but if you plan to exit the NPS early, the scheme permits withdrawal only after 3 years. On exiting, you must use at least 40% of your accumulated corpus to buy an annuity, while the remaining 60% can be withdrawn as a lump sum. Regular contributions are needed to keep your account active and growing.

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What is the limit of deduction under 80CCD(2)?

The deduction under Section 80CCD(2) is based on your employer’s contribution. For central government employees, the maximum is 14% of salary, and for others, it’s 10% of salary (basic + DA). This is separate from the Rs. 2 lakh deduction limit and can be claimed even under the new tax regime.

What is the lock-in period for NPS under Section 80CCD(1B)?

NPS Tier I accounts, which qualify for deductions under Section 80CCD(1B), come with a lock-in period until the age of 60. However, partial withdrawals are allowed after 3 years, subject to specific limits. There is no tax benefit for Tier II accounts. NPS is designed as a long-term retirement savings tool, so early withdrawals are restricted.

Can I claim both 80C and 80CCD(1B)?

Yes, you can claim both. The Rs. 1.5 lakh limit under 80C (which includes 80CCC and 80CCD(1)) can be claimed alongside the additional Rs. 50,000 under Section 80CCD(1B). So, if you invest Rs. 1.5 lakh in ELSS, PPF, etc., and Rs. 50,000 in NPS, you may claim a total deduction of Rs. 2 lakhs.

What is Section 80CCD(1B) deduction?

Section 80CCD(1B) allows an additional tax deduction of up to Rs. 50,000 for contributions made to the NPS Tier I account. This deduction is available exclusively to NPS subscribers and is over and above the Rs. 1.5 lakh deduction available under Section 80C. It is available only under the old tax regime.

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