Understanding Income Tax Section 80CCD

As an adult, paying taxes is a must. Taxes must be paid by any citizen who earns more than a specific threshold, whether via employment, self-employment, or founding their own business.

However, in order to reduce an individual's tax payment, the government has created a variety of tax exclusions and deductions under Section 80 of the Income Tax Act, 1961. Section 80CCD is one of the sub-sections under Section 80 that addresses payments made to specific pension plans that the Indian government has disclosed. 

This helps with retirement savings in addition to tax savings through pension plans.

What does 80CCD stand for?

According to Section 80CCD of the Income Tax Act of 1961, an individual's contributions to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY) are eligible for tax deductions. Employers' NPS payments to their staff are likewise subject to the restrictions of Section 80CCD. 

The National Pension Scheme was created by the Indian Central Government as a low-cost pension scheme for its inhabitants. In addition to government personnel, the program is open to self-employed people and employees in the private sector. Helping people open retirement accounts so they can live comfortably in the future is the goal of the NPS.

Securities Covered Under Section 80CCD

The following is a list of investments covered by Section 80CCD of the Income Tax Act for income tax deductions. You can deduct these expenses from your income when filing your income tax returns.

• All donations made by individuals to the Atal Pension Yojana and the National Pension Scheme are eligible for tax deductions under Section 80CCD.
• All employer contributions to the National Pension Scheme on behalf of its staff members.

Limitations on Section 80CCD Tax Deductions

Section 80CCD allows the following list of income tax deductions, together with the maximum deduction that can be claimed:

• Under Section 80CCD, the highest amount that can be deducted is ₹2,000,000. This amount includes the additional ₹50,000 deduction allowed by Section 80CCD Subsection 1B.
• Any tax advantages or deductions obtained under Section 80CCD are not transferable to Section 80C. Sections 80CCD and 80C provide a combined deduction that cannot exceed ₹20,00,000.
• Money from surrendered accounts or after retirement from the National Pension Scheme will be taxed at the appropriate rate.
• Any funds that you receive from your NPS and reinvest into an annuity plan will remain fully exempt from taxes.

Subsections under Section 80CCD

Section 80CCD has been further subdivided into two subsections in accordance with the rules of the Income Tax Act. The first subsection addresses contributions to the NPS made by individuals and self-employed individuals, while the second subsection addresses contributions made by employers. The following are the two sections of the 80CCD of the Income Tax Act:

1. Section 80CCD (1)

Section 80CCD (1) of the Income Tax Act provides for a deduction for self-employed and employed individuals who contribute to the National Pension System and the Atal Pension Yojana. This Section allows anyone over the age of 18 who contributes to an NPS account or an Atal Pension Yojana scheme to claim a deduction of up to ₹1,50,000 per year. NRIs are also covered under this. That being said, the following conditions must be met:

• A public or private sector employee is not permitted to deduct more than 10% of their pay in NPS or APY contributions. In this sense, "salary" refers to both base pay and a dearness allowance.
• For self-employed individuals, the upper limit is 20% of their gross income.

2. Section 80CCD (1B)

In the 2015 Union Budget, the government amended Section 80CCD by adding a new Subsection 80CCD (1B). This was carried out in order to augment funding for the NPS and Atal Pension Yojana initiatives. Working individuals or independent contractors can deduct an additional ₹ 50,000 from their contributions to the NPS or the Atal Pension Yojana under Section 80CCD (1B). This deduction is above the upper limit permitted under Section 80CCD (1). When making this claim, make sure there isn't a duplicate; that is, don't claim the same contribution amounts under two distinct Sections.

3. Section 80CCD (2)

Employees with salaries have access to additional benefits such as employer payments to pension systems like NPS. Under Section 80CCD (2) of the Income Tax Act, employees may be able to claim income tax deductions for contributions made by their employer. It is reliant on the subsequent circumstances:

• Under Section 80CCD (2), private sector employees may deduct up to 10% of their gross income (base salary plus dearness allowance).
• Employees of the government are eligible to get up to 14%

Eligibility criteria for Section 80CCD

The following are the eligibility requirements for Section 80CCD under the Income Tax Act:

• Any salaried or self-employed individual who makes contributions to the Atal Pension Yojana or National Pension Scheme is covered by Section 80CCD.
• Any company or organization that contributes to the National Pension Scheme on behalf of its employees is subject to Section 80CCD.
• To be eligible for Section 80CCD tax deductions under NPS Tier 1 Account, an investor must invest a minimum of ₹6,000 per year or ₹500 per month in the NPS.
• To be eligible for Section 80CCD deductions under NPS Tier 2 Account, an NPS must receive a minimum of ₹2,000 annually or ₹250 per month.

Conclusion

Section 80CCD of the Income Tax Act provides you with a substantial deduction on your taxable income. Because the tax system is susceptible to change, conduct your research before beginning the process right away. Furthermore, get in touch with a reliable financial counselor right now to maximize your tax savings under Section 80C of the Income Tax Act!