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

The Government of India notifies pension schemes that can help salaried and self-employed individuals to get tax benefits under Section 80CCD of the Income Tax Act, 1961. Section 80CCD (1) and 80CCD (2) offer tax deductions on contributions made to the National Pension Scheme (NPS) and Atal Pension Yojana accounts.

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In this article, let us learn about these sections in detail.

What is Section 80CCD?

Let us understand the Section 80CCD of the Income Tax Act, 1961 in the following way:

  • The tax benefits are available to the following categories of individuals:

    • Salaried employees

    • Self-employed individuals

    • NRIs

  • Section 80CCD of the IT Act offers income tax benefits for contributions made to the Central Government notified pension plans

  • The tax deductions are available for investments made into the following pension schemes:

    • National Pension Scheme (NPS)

    • Atal Pension Yojana

  • The investments contributed by the following are allowed for tax benefits under Section 80CCD:

    • By salaried employees: Investments made to their NPS or Atal Pension Yojana accounts

    • By self-employed individuals: Investments made into their NPS or Atal Pension Yojana accounts

    • By employers: Contributions made into the NPS account of their employee

  • Section 80 CCD along with Section 80CCD (1B) allows an individual to claim a maximum tax deduction of up to Rs. 2 lakhs per financial year.

  • The major sub-sections of Section 80CCD are as follows:

    • Section 80CCD (1): Deals with income tax deductions available to individuals for investments made to the pension fund account

    • Section 80CCD (2): Deals with the income tax deductions on contributions made by the employer to the employee’s pension account

Let us take a detailed overview of Section 80 CCD(1) and 80 CCD(2) in the next section of this article.

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

The tax benefits available on contributions made to the central government pension schemes are as follows:

Sections of
IT Act, 1961
Tax Deduction Details Tax Benefits
Section 80CCD (1) Contributions made by employee/ self-employed individuals to their NPS/Atal Pension Yojana accounts
  • Up to 10% of salary (basic+ DA) OR
  • Up to 20% of salary (basic+ DA)
Section 80CCD (2) Contributions made by the employer to the NPS/ Atal Pension Yojana accounts of their employee
  • Up to 10% of salary (basic+ DA) for private-sector employees 
OR
  • Up to 14% of salary (basic+ DA) for government employees
Section 80CCD (1B)
  • Self-contributions made by an individual to their NPS/ Atal Pension Yojana account
  • The benefit is available over and above the limits under Section 80CCD (1)
Up to Rs. 50,000
Section 
80C
Investments made into tax-saving instruments Up to Rs. 1.5 lakhs*
Section 80CCC Investments made into annuity or retirement plans Up to Rs. 1.5 lakhs*

*The tax deduction limit of up to Rs. 1.5 lakhs includes combination of Section 80C, 80CCC, and 80CCD (1).

  1. Section 80CCD (1)

    Section 80 CCD(1) allows taxpayers to claim tax benefits on the amount deposited in the central government pension schemes

    Let us understand the features in the list below:

    Tax deductions are available to

    Salaried employees, self-employed individuals, and NRIs

    Age criteria: 

    For individuals above 18 years of age

    Pension fund investment limits:

    • For Salaried Employees: Up to 10% of the basic pay and Dearness Allowance (DA) combined or up to 10% of the gross individual income

    • For Self-employed and NRIs: A maximum of 20% of their gross income up to a limit of Rs. 1.5 lakhs

  2. Section 80CCD (2)

    Section 80 CCD(2) allows tax deduction benefits to the employee on the contributions made by the employer to the employee’s pension fund account.

    Let us understand the features of this section in the list mentioned below:

    Tax Deductions are Available for:

    Salaried individuals only

    Contribution amount limit:

    • Government employees: Up to 14% of the sum of basic pay and DA

    • Private-sector employees: Up to 10% of their salary (basic pay and dearness allowance)

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

Important Points to Consider 

  1. Definition of Salary: 

    The term “salary” for Section 80CCD (1) and 80CCD (2) is the sum of the Basic Salary and Dearness Allowance (DA). It excludes all other allowances and perquisites.

  2. Maximum Tax Deductions: 

    A total of Rs. 1.5 lakhs tax deductions are available under Section 80CCD (1), 80C, and 80CCC together.

  3. Investment Limit in NPS (Tier I) Account: 

    The individual must invest a minimum of Rs. 6000/ year or Rs. 500/ month to avail of the tax benefits.

  4. Investment Limit in NPS (Tier II) Account:

    Invest a minimum of Rs. 2000/year or Rs. 250/month to get the tax deduction benefits.

  5. Investments are Mandatory for:

    Investments in NPS accounts are mandatory for government employees. Contributions to the NPS scheme are voluntary for other individuals.

  6. Taxation on NPS/ Atal Pension Yojana Returns:

    The maturity amount received from NPS or Atal Pension Yojana funds is taxable as per the applicable tax regime under the IT Act, 1961.

To Sum Up

The Indian government provides tax deductions under Section 80CCD (1) and 80CCD (2) to all individuals to help reduce their tax burden. These tax benefits also encourage taxpayers to save funds for their post-retirement life. Learn the benefits offered under various sections of the Income Tax Act, of 1961 to make well-informed financial planning.

FAQ's

  • What is the difference between Section 80CCD (1) and 80CCD (2)?

    Section 80 CCD(1) allows tax deduction benefits to salaried and self-employed individuals for the investments made into the NPS or Atal Pension Yojana account.
    Salaried employees can claim tax deductions under Section 80 CCD(2) for the contributions made by the employer to the employee’s NPS/ Atal Pension Yojana funds.
  • What is the difference between Section 80CCD (1) and 80CCD (1B)?

    Salaried employees, self-employed individuals, and NRIs can claim tax benefits under Section 80 CCD (1) for the contributions made into their NPS or Atal Pension Yojana accounts.
    Under Section 80CCD (1B), salaried and self-employed individuals, and NRIs can claim tax deductions for the investments made into the government pension schemes. The tax benefit is up to Rs. 50,000 over and above the limit of Rs. 1.5 lakhs under Section 80CCD.
  • Can I claim both Section 80CCD (1) and 80CCD (2)?

    Yes, eligible individuals can claim tax benefits of a maximum of Rs. 1.5 lakhs while reading both Section 80CCD (1) and 80CCD (2) together.
  • Who can claim Section 80CCD (2) deduction?

    Salaried government and private-sector employees can claim tax benefits under Section 80CCD (2).

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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