Section 80CCD (1) and 80CCD (2)

What is Section 80CCD?

Section 80CCD of the Income Tax Act allows deductions on contributions made towards:

• National Pension Scheme (NPS)
• Atal Pension Yojana (APY)

It is divided into three subsections:

• 80CCD(1): Deduction for self/employee contribution.
• 80CCD(1B): Additional deduction of ₹50,000 (beyond 80CCD(1)).
• 80CCD(2): Deduction for employer's contribution (only for salaried individuals).

Section 80CCD(1): Deduction for Individual's Contribution

Section 80CCD(1) allows salaried and self-employed individuals to claim deductions for their contributions towards NPS. It applies to:

• Indian citizens aged between 18 to 70 years.
• NRIs are also eligible.
• Available only under the old tax regime.

Deduction Limit under Section 80CCD(1)

• Salaried individuals: Up to 10% of salary (basic + dearness allowance).
• Self-employed: Up to 20% of gross total income.

This deduction is part of the ₹1.5 lakh limit under Section 80C, 80CCC, and 80CCD(1) combined.

Section 80CCD(1B): Additional Deduction of ₹50,000

Section 80CCD(1B) was introduced to encourage retirement savings. It provides an additional deduction of ₹50,000 on self-contributions to NPS, over and above the ₹1.5 lakh limit under Section 80C of the Income Tax Act.

• This benefit is only available under the old tax regime.
• Applicable to both salaried and self-employed individuals.
• Total deduction possible with 80CCD(1) + 80CCD(1B): ₹2,00,000

Section 80CCD(2): Deduction for Employer's Contribution

Section 80CCD(2) covers the employer's contribution towards the employee's NPS account. It applies only to salaried individuals, not self-employed.

Deduction Limits:

• New Tax Regime: Up to 14% of basic salary + dearness allowance for central government employees.
• Old Tax Regime: Up to 10% of basic salary + dearness allowance for private sector employees.

This deduction is over and above the ₹2 lakh limit under 80C + 80CCD(1B). There is no monetary ceiling under this section, as long as it fits the percentage limits.

How Section 80CCD Works?

Let's take an example:

Mr N, a central government employee, earns the following:

• Basic Salary: ₹2,20,000
• Dearness Allowance: ₹80,000
• Employer's NPS Contribution: ₹70,000

Under New Tax Regime:

• 14% of ₹3,00,000 = ₹42,000
• NPS contribution: ₹70,000
• Deduction allowed under 80CCD(2): ₹42,000

Under Old Tax Regime:

• 10% of ₹3,00,000 = ₹30,000
• NPS contribution: ₹70,000
• Deduction under 80CCD(1): ₹30,000

If Mr N already claims ₹1,30,000 under Section 80C:

• 80C + 80CCD(1) = ₹1,60,000 (₹10,000 above limit)
• He can use Section 80CCD(1B) to claim the extra ₹10,000
• Total deduction = ₹1,50,000 (under 80C) + ₹10,000 (under 80CCD(1B)) = ₹1,60,000

Terms & Conditions to Claim Deductions Under Section 80CCD

• Eligibility: Indian citizens (18–70 years), including NRIs, can invest in NPS.
• Mandatory for government employees, voluntary for others.
• Maximum deduction limit under 80CCD = ₹2,00,000:
  • ₹1,50,000 under Section 80CCD(1)
  • ₹50,000 additional under Section 80CCD(1B)
• Employer's contribution under 80CCD(2) is additional to the ₹2 lakh limit.
• Deductions under 80CCD cannot be double claimed under Section 80C.
• Monthly annuity received from NPS is taxable.
• Amount reinvested in annuity plans is exempt from tax (with proof of payment).

Difference Between Section 80CCD(1), 80CCD(1B), and 80CCD(2)