Deductions Under Section 80CCD(1B)

Understand the eligibility criteria, deduction limits, and tax limit exemptions under Section 80CCD(1B).
Deductions Under Section 80CCD(1B)
2 min read
12 January 2024

The Income Tax Act of India offers various avenues for taxpayers to optimise their tax liabilities while encouraging investments in specific financial instruments. One such provision is Section 80CCD(1B), which pertains to deductions related to contributions made towards the National Pension Scheme (NPS). In this article, we will delve into the intricacies of Section 80CCD(1B), shedding light on its provisions, benefits, and the process of availing tax benefits.

What is Section 80CCD(1B)

Section 80CCD(1B) is a special provision under the Income Tax Act that allows taxpayers to claim an additional deduction over and above the limits specified in Section 80C. This deduction is applicable for contributions made towards the National Pension Scheme.

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 The remaining 60% can be withdrawn as a lump sum or in phased installments.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.

Eligibility under Section 80CCD(1B)

Any individual, whether salaried or self-employed, can claim deductions under Section 80CCD(1B) by contributing to the NPS. The deduction is available to both new and existing NPS subscribers.

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

The National Pension Scheme (NPS) in India provides tax benefits during the contribution phase, but it is vital to comprehend the taxation aspects associated with NPS withdrawals:

Taxability of NPS withdrawals: At age 60, 60% of the NPS corpus can be withdrawn tax-free; the remaining 40% used for annuity purchase is taxed based on the individual's slab rate.

Partial withdrawals: Up to 25% of the subscriber's contributions can be withdrawn without tax implications before age 60, but returns earned on this amount are taxable.

Tax on lump sum withdrawal: Lump sum withdrawal at retirement is subject to taxation, dependent on whether the subscriber opts for a lump sum or annuity purchase.

Annuity income taxation: Annuity income post-retirement is taxed based on the individual's applicable income tax slab.

Tax Deduction at Source (TDS): TDS rates apply to NPS withdrawals, with 10% for lump sum withdrawals and regular TDS norms for annuity payments.

Premature exit tax: Exiting NPS before age 60 incurs a 10% penalty on the entire corpus.

Tax benefits for corpus utilisation: Tax benefits on NPS contributions are limited to the contribution phase, with deductions under Section 80C and Section 80CCD.

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

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.