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What are Sections 80 CCD (1) and 80 CCD (2)?

Section 80 CCD(1) and section 80 CCD(2) are tax provisions of the Income Tax Act 1961. Employees can claim their contribution to these schemes with maximum tax benefits.

The Income Tax Department has introduced several provisions to minimise the tax liability of individuals. These provisions encourage citizens to invest in various financial instruments. One of the well-known tax provisions is section 80C, which helps taxpayers record their spending, savings, and investments for tax returns.
 

Sections 80 CCD (1) and section 80 CCD (2) are the major subsections of this tax provision. Read on to get the details of deductions, eligibility, and more.

What is Section 80 CCD Tax Deduction in Income Tax? 

Section 80 CCD represents tax exemptions if a contribution is made under the government's pension scheme. The pension schemes include the National Pension Scheme (NPS) and Atal Pension Yojana. Both employers and employees can avail of tax benefits by contributing to the schemes.
 

The two subsections in 80 CCD are 80 CCD (1) and 80 CCD (2). In general, section 80 CCD (1) indicates the contribution to NPS by the employee, whereas section 80 CCD (2) signifies the contribution done by the employer. These deductions help employers to get pensions after retirement.

Who is Eligible for Section 80 CCD?

The individuals eligible to get tax benefits from contributions to the pension scheme are:
 

  1. Central Government employees
  2. Private company employees
  3. Self-employees

Tax Deductions Under Section 80 CCD (1)

Section 80 CCD (1) tax deduction can include the employee's salary and dearness allowance (DA). However, the deduction of sections 80 C and 80 CCD (1) must not exceed ₹1.5 lakhs. The maximum limit of deduction is listed as follows:
 

  • For a government employee, the tax deduction limit is 10% on earning ₹1.5 lakhs per annum.
  • For a self-employed individual, the tax deduction limit is 20% of their total income in the past year.

Tax Deductions Under Subsection 80 CCD (1B)

The Income Tax Department has introduced another subsection, 80 CCD (1B). According to this, another ₹50,000 can be contributed by the taxpayer voluntarily. Indian residents and Non-Resident Indians (NRIs) under the age of 60 and above 18 are eligible for tax deductions as per section 80 CCD (1B).
 

Therefore, the total deduction of section 80 CCD (1) + 80 CCD (1B) = ₹1.5 lakhs + ₹50,000.

Illustration of Section 80 CCD (1) and Section 80 CCD (1B)

Let’s take the example of Mr. Raja, a central government employee. He has contributed an amount of ₹60,000 to the NPS account.
 

  • His basic salary is ₹2,00,000.
  • His DA and other allowance is ₹1,00,000.
  • 10% of his salary and DA has been deducted, i.e., 10% of ₹3,00,000, which equals to ₹30,000.
  • The eligible tax deduction under section 80 CCD (1) is ₹30,000. On the other hand, it is ₹50,000 according to section 80 CCD (1B).
     

To calculate the maximum tax benefit allowed by section (1B), we can use the following formulae:
 

Contribution to NPS scheme - tax deduction under section 80 CCD(1) = Allowed tax deduction by section (1B)
 

Thus, ₹60,000 - ₹30,000 = ₹30,000 as tax deduction by section (1B)

Tax Deductions Under Section 80 CCD (2)

Section 80 CCD (2) tax deduction includes salary and DA. However, only salaried employees can benefit from this section.
 

Here, the organisation's employer contributes to the NPS scheme on behalf of the employee. The contribution can be more or equal to the employee's contribution.
 

Government employees have a section 80 CCD 2 maximum limit of 14%. Other private or corporate employees are offered a 10% limit.

The Major Difference Between Section 80 C and 80 CCD

Section 80C works under various investment plans, while section 80 CCD focuses solely on pension plans. Thus, the claimed benefits from 80 CCD cannot be availed again from section 80C. However, the combination of claims under both sections is allowed within the range of ₹2 lakhs.

Details of Section 80 CCD and 80 CCD (2)

Tax Provision

 

Contributor

 

Maximum Limit

 

Section 80 CCD (1)

 

Employee

 

  • 10% of the total salary of government employees.
  • 20% of gross income for self-employed persons.

 

 

 

Section 80 CCD (1B)

Employee

 

₹50,000

 

 Section 80 CCD (2)

 

Employer

 

  • 14% of the total salary for government employees.
  • 10% for other employees

 

Terms and Conditions for Tax Deductions Under Section 80 CCD

  • The tax provisions of sections 80 C and 80 CCD subdivisions apply to types of employees.
  • The contribution to section 80 CCD (1), (1B), and (2) contributes to NPS and Atal Pension Yojana schemes only.
  • The sum of the tax deduction in a year must not exceed 2,00,000 (including all tax provisions)
  • The pension claims received from the scheme are liable for tax deductions. But, if invested back in an annuity plan, that can be exempted from deductions.
  • All the claims for returns must be submitted with documents of proof.

Conclusion

It is important to note that expenses such as home loan EMIs and tuition fees for children can also contribute to tax returns. Therefore, consider investing in life insurance, Public Provident Fund (PPF), Employee Provident Fund (EPF), or other government schemes to minimise your tax liability.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is the significance of the National Pension Scheme under section 80 CCD (1) and section 80 CCD (2)?

The National Pension Scheme, or NPS, is a retirement planning scheme with two account tiers. In tier 1 accounts, employees must invest at least ₹500 per month. On the other hand, employees with a tier 2 account need to invest ₹250 per month.

What withdrawal options are available in the NPS scheme under section 80 CCD(1) and section 80 CCD(2)?

You can either partially or fully withdraw the amount from the NPS scheme. In case of full withdrawal, 20% can be availed as cash. However, the remaining 80% can only be withdrawn as annuities, which is taxable. If partially withdrawn, 25% can be availed as cash. Withdrawals can be made thrice within a gap of 5 years.

What is the tax deduction limit for the Atal Pension Yojana under section 80 CCD (1)?

The Atal Pension Yojana is a retirement scheme. The tax deduction limit under this scheme is ₹1.5 lakhs. An additional ₹50,000 can also be contributed, similar to the NPS scheme.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed1 issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.