NPS Tax Benefit under Section 80CCD (1B)

The National Pension System (NPS) offers a tax benefit under Section 80CCD (1B). It allows you to claim an extra deduction of up to ₹50,000 on your taxable income for contributions to your NPS account. This helps you save more for retirement while lowering your tax bill.

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What is Section 80CCD (1B)?

Section 80CCD (1B) is a provision under the Income Tax Act, 1961 in India that allows you to claim an additional deduction of up to ₹50,000 from your taxable income for contributions made to the National Pension System (NPS). This NPS tax benefit is over and above the ₹1.5 lakh limit available under Section 80C.

Union Budget 2024 Updates:

  • The Union Budget 2024 announced an increased employer contribution limit for employees' NPS from 10% to 14%.

  • It also introduced NPS Vatsalya for minors.

Eligibility Criteria for Section 80CCD (1B) Deductions

The following subscribers are eligible to avail of the deductions under Section 80CCD(1B):

  • Category of Eligible Subscribers:

    • Employed individuals

    • Self-employed individuals

    • Non-Resident Indians (NRIs)

  • Age Criteria: 18 – 70 years of age

  • Tier I Account: Contributions must be made to the Tier I NPS account.

  • Contribution Type: Applies only to self-contributions, not employer contributions.

Important Points to Note About Sec 80CCD (1B)

  • Total deductions under Section 80C + 80CCC + 80CCD (1) is up to ₹1.5 lakhs.

  • The ₹50,000 deductions under Sec 80CCD (1B) are independent of the above mentioned ₹1.5 lakhs.

  • Hence, the total NPS tax benefits you can claim is a total of ₹1.5 lakhs + ₹50,000, i.e., ₹2 lakhs.

Overview of the NPS Scheme

Section 80CCD (1B) is available with the National Pension Scheme (NPS) which is a tax-saving investment option. This government-backed retirement savings scheme is available for both salaried and self-employed individuals.

  • Objective of NPS:  It aims to provide you with tax saving benefits during your working years and a regular income stream after retirement.

  • NPS Investments: The contributions made to the NPS Account are invested in various market-linked investments like equities, debt securities, and Money Market Instruments (MMIs).

  • NPS Returns: The returns from your NPS contributions are market-linked, which generally lies between 9 – 15% p.a., depending on the market performance. 

  • Investment Choices: Your NPS contributions can be managed with the Active Choice and Auto Choice accounts.

    • Active Choice: It allows you to actively choose the asset allocation of your NPS Account between debt funds, equities, and MMIs.

    • Auto Choice: This choice allows government-mandated levels for asset allocation, which is decided based on your age. The aggressive, moderate , and conservative Life Cycle Modes are available with this investment choice.

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  • Tax Benefits:

    • Section 80CCD (1): Up to ₹1.5 lakh deduction, including Section 80C and 80CCC benefits.

    • Section 80CCD (1B): Additional ₹50,000 deduction, over and above Section 80CCD (1).

    • Mutual Exclusivity: Investing the full ₹1.5 lakh in NPS under Section 80CCD (1) excludes other tax benefits under 80C (e.g., ELSS, PPF, fixed deposits).

Types of NPS Accounts

The NPS scheme provides you with Tier 1 and Tier 2 NPS accounts, which are as follows:

Feature Tier 1 Account (Pension Account) Tier 2 Account (Additional Account)
Eligibility All Indian citizens All Indian citizens
Minimum Contribution ₹500 per contribution ₹250 per contribution
Maximum Contribution No limit No limit
Lock-in Period Until age 60 No lock-in period
Withdrawal Partial withdrawal allowed only under certain conditions Withdrawals allowed anytime
Purpose Long-term retirement savings Flexible investment option
Annuity Purchase Mandatory Not required
Tax Deduction Eligibility Contributions qualify for deductions of up to ₹1.5 lakhs under Section 80CCD(1) and 80CCD(1B) Only contributions by Central government employees qualify for tax benefits under Section 80C
Maximum Deduction Limit Up to ₹2 lakhs (₹1.50 lakh under Sec 80CCD(1) and ₹50,000 under Section 80CCD(1B)) No tax deduction for private-sector employees; gains taxable at respective slab rates
Requirement to Open No prerequisite Must open an NPS Tier 1 Account first

Ways to Avail of National Pension Scheme Tax Benefit 

  • You can invest in NPS both online and offline.

  • You can use the NSDL e-Gov portal (also known as Protean) to open an NPS account online, use the NSDL e-Gov portal (now called Protean).

  • Visit an authorised bank branch or nearest Post Office branch, acting as a Point of Presence (PoP) to open the NPS account offline.

  • Most banks and non-banking financial companies are authorized POPs.

Key Points to Remember to Claim Section 80CCD (1B) Benefits

You must keep in mind the following points while claiming the benefits under Section 80CCD (1B):

  • You must file taxes under the old tax regime to avail of Sec 80CCD (1B) and opt out of the default new tax regime, which is provided under Section 115BAC(1A).

  • The additional deduction of ₹50,000 is available for contributions made only to the NPS Tier 1 Account.

  • Tier 2 Account is not eligible for Section 80CCD(1B) deduction.

  • Deductions under Section 80CCD(1B) are available to both salaried and self-employed individuals.

  • You need to provide documents as evidence of your NPS contributions.

  • Partial withdrawals are allowed from the NPS account under the specified conditions.

  • The total exemption limit under Section 80CCD(1B) is ₹50,000, which is separate from the Section 80C, 80CCC and Section 80CCD (1) deductions. This allows you to claim a maximum deduction of ₹2 lakh.

  • In case of your demise, if the nominee chooses to close the NPS account, the amount received by the nominee is exempt from taxation.

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

The following table will give you a quick comparison between the two popular subsections of Section 80CCD: 

Criteria Section 80CCD (1) Section 80CCD (1B)
Eligibility Salaried and self-employed individuals Salaried and self-employed individuals
Maximum Deduction Up to 10% of salary (for salaried) or 20% of gross income (for self-employed), capped at ₹1.5 lakh ₹50,000 (additional to Section 80CCD (1))
Combined with Section 80C Yes, part of the ₹1.5 lakh limit No, separate from Section 80C limit
Applicability NPS Tier 1 and Atal Pension Yojana NPS Tier 1 only
Eligibility Salaried and self-employed individuals Salaried and self-employed individuals

Documents Required to Claim NPS Tax Benefits

You need the following documents to claim the NPS tax benefits under Section 80CCD (1B) of the Income Tax Act, 1961:

  • Active bank account details

  • PAN Card copy

  • Aadhaar Card copy

Tax on NPS Withdrawal

Learn the taxation rules for NPS withdrawals from the points listed below: 

  • Taxation on Partial Withdrawals: 20% of the contributions are tax-exempt, and the remaining 80% must go into an annuity plan.

  • Taxation on Account Closure/ Opting-out of NPS Scheme: 40% of the NPS pension fund value is tax-exempt.

  • Taxation on Maturity of NPS Account: 60% of the NPS pension fund value is tax-free and remaining 40% is mandatory to be used for annuity plan purchase. The annuity income is taxable on the payout.

NPS Benefits under Section 80C, 80CCC, 80CCD (1), 80CCD (1B), and 80CCD (2)

The Section 80C, Section 80CCC, Section 80CCD (1), Section 80 CCD(1B), and Section 80CCD (2) provide various National Pension Scheme tax benefits as mentioned in the following table: 

Section under IT Act, NPS Description Benefit Limit
Section 80C General tax-saving investments Up to ₹1.5 lakh
Section 80CCC Pension plan contributions Up to ₹1.5 lakh (shared with 80C limit)
Section 80CCD (1) Employee's NPS contributions Up to ₹1.5 lakh (shared with 80C limit)
Section 80CCD (1B) Additional NPS contributions Up to ₹50,000 (exclusive limit)
Section 80CCD (2) Employer's NPS contributions Up to 10% of salary (no monetary cap)

FAQs

  • What is Section 80CCD (1B)?

    Section 80CCD(1B) under the Income Tax Act, 1961 allows you to avail of an extra deduction of up to ₹50,000 for your contributions in the National Pension Scheme (NPS).
  • What is the difference between 80CCD (1B) and 80C?

    The key difference between the Section 80CCD (1B) and Section 80C is that the Sec 80CCD (1B) offers an additional deduction of up to ₹50,000 on your NPS contributions, while the Sec 80C provides a tax benefit of up to ₹1.5 lakh for payments made in the general tax-saving best investment options like Unit Linked Insurance Plans (ULIP), Equity Linked Savings Scheme (ELSS), and Tax-Saver FDs.
  • Can I split my NPS contribution in 80C and 80CCD (1B)?

    Yes, you can claim up to ₹1.5 lakh under 80C and an additional ₹50,000 under 80CCD (1B) for NPS contributions if you choose the old tax regime.
  • Can I claim both 80CCD (1B) and 80CCD (2)?

    Yes, you can claim tax benefits under both Section 80CCD(1B) and 80CCD (2). Section 80CCD (1B) is for individual contributions, while 80CCD (2) covers employer contributions.
  • Can I claim 80CCD (1B) in the new tax regime?

    No, deductions under Section 80CCD (1B) are not available in the new tax regime.
  • What are specified diseases under 80DDB?

    Specified diseases under Section 80DDB include cancer, chronic renal failure, Parkinson's disease, and other serious ailments listed by the government.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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