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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:
- Central Government employees
- Private company employees
- 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
|
|
Section 80 CCD (1B) |
Employee
|
₹50,000
|
Section 80 CCD (2)
|
Employer
|
|
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.
