Section 80CCD: Deductions under Section 80CCD of Income Tax

A deduction means the amount is reduced from your taxable income. The new amount post deduction becomes your taxable income. Deductions reduce tax payable and help you save more. So, what is section 80CCD and what are the deductions allowed under section 80CCD of the Indian Income Tax Act?

What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961 allows you to claim a deduction of the amounts that you invest in the National Pension System (NPS) and the Atal Pension Yojana (APY). You can claim a deduction of a maximum amount of Rs.2 lakhs, u/s 80CCD, in a given financial year. The Rs.2 lakhs has sub-caps of Rs.1.5 lakhs under section 80CCD (1) and Rs.50,000 under section 80CCD(1B) including investments made under Section 80C as well.

Components of Section 80CCD

Section 80CCD is further divided into 2 subsections, namely, section 80CCD (1) and section 80CCD (2). This subdivision helps differentiate contributions made by you from the contributions made by your employer.

a) Section 80CCD (1)

Under this subsection, you can claim a deduction of up to Rs.1.5lakhs in a given financial year. The contributions may be made by you, your employer or even the government. The contributions may be made either to NPS or APY.

• Section 80CCD(1B): Another section nested under section 80CCD (1) and allows an additional deduction of up to Rs.50,000 from your taxable income on contributing to the NPS.

b) Section 80CCD (2)

If your employer contributes money to your pension fund, you can claim a deduction, of up to 10% of your basic salary + dearness allowance, under this sub-section.

Investment Option Under Section 80CCD-NPS

NPS is an avenue to make long-term savings and plan for cash flows post-retirement through sustainable, safe and regulated market-linked returns. NPS is managed by Pension Fund Regulatory and Development Authority (PFRDA), a body set up by an act of the Indian parliament.

Details about National Pension System (NPS)

NPS or the New Pension System has been a great long-term investment option for dedicated retirement savings. Here are the rules and conditions for investing in and withdrawals from NPS:

Who can Invest/Conditions for Investing in NPS

• If you are a resident or non-resident Indian citizen in the 18-65 years age group you may contribute to NPS
• You must contribute periodically with amounts of your choice

Returns

• Your investments generate a corpus in the long run
• Save for retirement and get an adequate income each month after you retire.
• The corpus is used to generate annuities/cash flows, commonly called “pension”
• Your contributions are invested by PFRDA across bonds, debentures, bills and shares.
• NPS’ historical returns have been between 9.5% and 13% in its different schemes. For example, if you invest Rs.1,000 per month for 25 years at an 11% rate of interest, the corpus would be approximately Rs. 16 lakhs.

Know More About - NPS withdrawal

Type of Accounts

NPS accounts are of two 2 types-Tier 1 and Tier 2. Tier 1 accounts don’t permit withdrawals and have tax benefits. Tier 1 accounts are used for corpus creation while planning for pension and retirement.

Terms & Conditions of Section 80CCD

The terms and conditions applicable to investments done under section 80CCD are:

i. You may claim deduction irrespective of whether you are salaried or self-employed
ii. Investment is optional for private sector employees and self-employed individuals
iii. The maximum limit for deduction is Rs.2 lakhs. This limit includes the additional deduction under sub-section 1B
iv. If you claim a deduction under section 80CCD, you cannot claim the same again under section 80C
v. The combined amount to be claimed as deduction under both sections 80C and 80CCD cannot exceed Rs.2lakhs
vi. Monthly pension payments are liable for taxation
vii. The deduction is to be claimed when you file your income tax returns each year.

Other Investments to Maximize Annual Deductions

There are a host of other options as well that you may consider to invest your money and also save on taxes. A few are listed below:

1. Public Provident Fund (PPF)

PPF is a good avenue to save on taxes, u/s 80C, and also earn a guaranteed return. A big plus-it is backed by a sovereign guarantee of the Indian Government. Both employed and self-employed people can use this to save on taxes and create wealth.

2. Sukanya Samriddhi Yojana (SSY)

SSY focuses on the education and marriage of the girl child and creates financial security for her. It secures the child’s future by empowering the parents to build a fund that gives a guaranteed interest rate of 7.6% per annum

3. Equity Linked Savings Scheme (ELSS)

An ELSS is a type of mutual fund that comes with an attractive tax benefit. If you invest up to Rs.1.5lakhs in ELSS, you can claim a deduction, from taxable income, under section 80C. The investment will be locked for 3 years after which you can redeem the amount or switch over to another fund.

4. Unit Linked Insurance Plan (ULIP)

A ULIP is a 2-in-1 plan because it creates wealth plus offers a life cover to financially protect your family in case of your unfortunate, untimely demise. Amounts paid towards premium are deductible, from taxable income, under section 80C whereas all pay outs (which fall under section 10(10) are exempt otherwise it is taxable. ULIP is truly equivalent to NPS when it comes to long-term investing.

The following features make ULIPs your preferred investment choice for retirement:

- Invest up to 99 years of age in ULIPs like Invest 4G
- Build corpus till 60 and draw tax-free pension afterwards
- Invest in a diversified portfolio of equity and debt funds
- Manage your asset mix with automated strategies to mitigate equity market risk
- Use ULIPs to protect your children’s goals with the premium protection option

5. Guaranteed Plans

Life insurance saving plans like iSelect Guaranteed Future provide guaranteed benefits to investors. Thus, these plans offer safe growth over long-term investment along with tax savings. This savings plan by Canara HSBC Life Insurance offers the following benefits:

- Guaranteed maturity benefit
- Bonus additions for long-term investors
- Regular income pay-out for the selected period to help maintain liquidity
- Premium protection option to secure the goal in the case of important goals like a child’s higher education goal

Investments should be carefully planned so that you benefit from the growth of the fund as well as money saved due to tax benefits. Look out for instruments that give you tax benefits on investment and also on maturity. Have a balance of different types of such investments in your portfolio so that you make an overall gain from the process.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.