Deductions under Section 80CCD of Income Tax
Paying your income tax in an accurate and timely manner is crucial for the economic growth of the country. As a responsible citizen of India, you have to pay your taxes on time. The government has made several provisions in the Income Tax Act of 1961 that allow you deductions against investments in specific avenues. One such popular option is deductions under Section 80CCD.
1. What is Section 80CCD?
Section 80CCD relates to the deductions available to individuals against contributions made to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). Contributions made by the employers towards the NPS, also come under this section. NPS is a notified pension scheme from the Central Government.
2. National Pension Scheme under 80CCD?
The Central Government introduced NPS to provide the benefit of an organized pension scheme toIndian citizens. Initially, NPS was meant for government employees only but was later opened for the private sector as well as for the self-employed individuals. The basic motive behind NPS is to help individuals create a retirement corpus and receive a fixed monthly payout to help them lead a comfortable life post-retirement.
Here are some of the major highlights of the NPS:
(i) One must contribute to NPS until the age of 60 years. While it is mandatory for employees of Central Government, for other individuals it is voluntary.
(ii) 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.
(iii) 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.
(iv)There is an option to choose from various investment options like Equity funds, Government bonds, Government securities, etc.
(v) Partial withdrawals up to 25% of the contribution made by an individual, subject to certain conditions, is allowed.
(vi) Individuals can withdraw up to 60% of the corpus as a lump-sum payout and have to invest the remaining 40% in an annuity plan.
(vii) It is one of the cheapest equity-linked investment options in the market.
(Viii) Unlike Tier I account, there are no withdrawal restrictions on Tier II account. Since Tier I is a retirement account, you can withdraw the money only when you reach 60 years, as a lumpsum withdrawal and a pension. If you are getting out of NPS before 60, you will have to use at least 80 per cent of the money to buy an annuity. You can also take the money out under some special circumstances like medical emergency.
3. Categorizing 80CCD
Section 80CCD has been further divided into two subsections to provide clarity regarding the available deductions for income tax assesses. While one subsection deals with the rules about tax deductions available to salaried and self-employed professionals, the other pertains to contributions made by the employer towards NPS.
Following is detailed information regarding the two sections for Section 80 CCD.
(i) Section 80CCD (1)
This subsection defines the rules related to income tax deduction available to individuals for contributions made to the NPS. It is irrespective of the fact whether the contribution has been made by a government employee, private employee or a self-employed individual. The provisions of this section apply to all Indian citizens who are contributing to the NPS and are between the age of 18 to 60 years. This also applies to NRIs.
Following are the key provisions of Section 80 CCD (1):
1. The maximum deduction permissible under this section is 10% of the salary (basic + DA) or 10% of the gross income of the individual.
2. From FY 2017-18, this limit has been increased for the self-employed individuals to 20% of the Gross total income with the maximum limit being capped at Rs. 1,50,000/- for a given financial year.
A new amendment to the Section 80 CCD has been introduced in the Union budget of the year 2015 as sub-section 1B. Under these new provisions, individuals can claim an additional deduction of Rs. 50,000/-. This is available to both salaried as well as self-employed individuals. This has thereby raised the maximum deduction available under Section 80CCD to Rs. 2,00,000/-. Tax benefits under Section 80CCD (1B) can be claimed over and above the deductions available under Section 80CCD (1).
(ii) Section 80CCD (2)
The provisions under Section 80 CCD (2) come into effect when an employer is contributing to the NPS of an employee. The contributions towards NPS can be made by an employer in addition to those made towards PPF and EPF. The contribution made by the employer can be equal to or higher than the contribution of the employee. This section applies to only salaried individuals and not to self-employed individuals. The deductions under this Section can be availed over and above those of Section 80 CCD (1).
Section 80CCD (2) allows salaried individuals to claim deductions up to 10% of their salary which includes the basic pay and dearness allowance or is equal to the contributions made by the employer towards the NPS.
4. Terms and conditions for deductions under Section 80CCD
Following are the various terms and conditions governing the deductions under Section 80CCD.
(i) Deductions under Section 80CCD are available to salary as well as self-employed individuals. While it is mandatory for government employees, for other individuals, it is voluntary.
(ii) The maximum limit of deduction available under Section 80 CCD is Rs. 2 Lakhs; this includes the additional deduction of Rs. 50,000/- available under sub-section 1B.
(iii) Tax benefits availed under Section 80CCD cannot be claimed again under Section 80C, i.e. the combined deduction under Section 80C and 80 CCD cannot exceed Rs. 2 Lakhs.
(iv) The money received from NPS as monthly payments or as surrendered accounts will be liable for taxation as per the applicable provisions.
(v) Any amount received from NPS, which is reinvested in the annuity plan is entirely exempt from taxation.
The deductions available under Section 80CCD can be claimed at the end of the financial year when you are filing your income tax returns. You will be required to produce a proof of payment to be eligible for this deduction.
Investing in NPS: Tier I and Tier II Account
While NPS is slowly gaining popularity thanks to its low cost and host of tax-benefits, the choice of accounts offered in NPS tends to cause a lot of confusion at the time of investing.
When you want to invest in NPS, you first need to open an account under the Tier I before you can consider opening the Tier II account. It’s natural for people to wonder about the utility of two different accounts and why the Tier II account cannot be opened independently. You will be able to know the benefits of both accounts and should you go for the Tier II account later in this blog post.
Tier I and Tier II: Similar Structure
Both Tier I and Tier II NPS accounts are similar. Both have similar charges and choice of fund managers and fund schemes. The asset classes in which the fund managers can invest is also the same. The Pension Fund Manager (PFM) charges 0.01% on the assets managed, and the custodian charging 0.0032% as an asset servicing charge. The POP has the same charges on every transaction when you put money in Tier I or Tier II NPS. You can also port across PFMs and fund options with both NPS Tier I and Tier II.
Tier I and Tier II: The differences
NPS Tier I
The subscription to NPS commences with the opening of the Tier I account, which comes with a PRAN (Permanent Retirement Account Number). Your investment in the NPS Tier I account is locked-in until the age of 60. Before the age of 60, you can make partial withdrawals for specific purposes or you can go in for a premature exit (as explained below). Under NPS Tier I, you can save and invest to claim the tax deductions available under version sections of the Income Tax.
The tax benefits offered in NPS can be claimed only for the investments made in the Tier I account.
NPS Tier II
You can open the NPS Tier II account only when you already have a Tier I account. Tier II account is a voluntary account with flexible withdrawal and exit rules. Even though it works exactly like your NPS Tier I account, there are certain differences. Firstly, contribution to Tier II NPS has no tax benefits – you can’t claim deductions and on exit, the corpus is taxed. Unlike the Tier I account, there is no lock-in with savings in the Tier II account. You can withdraw from the Tier II account at any time. However, in functionality, both Tier I and Tier II are similar and so is the fund management costs as well as choice of investments.
Tier I and Tier II NPS
| |
|
|
|
| |
Tier I |
Tier II |
| Eligibility |
Any Indian citizen between 18 & 65 years of age |
Members of Tier I only |
| Lock-in |
Till the age of 60 years |
Nil |
| Minimum number of contributions in year |
1 |
Nil, you can choose not to make any contribution in a year |
| Minimum contribution for account opening |
Rs 500 |
Rs 1,000 |
| Minimum amount for subsequent contribution |
Rs 500 |
Rs 250 |
| Minimum number of annual contributions |
1 |
Not mandatory |
| Fund management charge |
Charges are same for both Tier I and Tier II accounts |
| Available asset classes |
Same for both |
| Equity (E): Scheme invests predominantly in Equity market instruments. |
| Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments |
| Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments |
| Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc. |
| Tax benefits on contribution |
Contribution to NPS Tier I qualify for tax deduction under Section 80C up to Rs 1.5 lakh. |
No tax benefit |
| Tax deduction is available under Section 80CCD (1B) up to Rs 50,000 in addition to Section 80C benefits. |
| Taxation on withdrawal |
At maturity, the entire corpus is tax-exempt |
The entire corpus can be withdrawn, which is added to income and taxed as per the tax slab one falls in |
Should you opt for Tier II NPS?
You know that structurally, all aspects of Tier I and Tier II NPS are the same. The choice of the available asset class to invest, option among fund manager and charges are also same. Yet there is a case to invest in Tier II NPS sans the tax benefits. The reason: if you are new to investing and have a Tier I NPS account, you could consider NPS Tier II as an open-ended mutual fund to invest towards any surplus savings.
The limited equity exposure of up to 75% in the case of NPS, limits the risk of volatility with equity, which is much desired by first-time investors. Moreover, you can benefit from the low investment cost as the Pension Fund Manager (PFM) charges is 0.01% on the assets managed and the overall cost of the NPS is the lowest compared to mutual funds. With no lock-in, the flexibility to withdraw from Tier II account allows you to dip into the savings in the account whenever you need, which makes the case to invest in Tier II NPS.
Disclaimer: The views and opinions expressed in this article are those of the author himself on the basis study and interpertation of self only.