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What is Section 80CCD(1) and 80CCD (2)?

Section 80CCD(1) and Section 80CCD(2) help individuals claim deductions on contributions to their retirement plans and permit employers to avail deductions for contributions made on behalf of employees, enhancing tax benefits for both parties.

  • 5,458 Views | Updated on: Jun 14, 2024

Income tax laws in India provide various methods for taxpayers to save money through deductions and exemptions.

Section 80CCD of the Income Tax Act, 1961, is one such provision that offers tax benefits related to contributions made towards the National Pension System (NPS).

What is Section 80CCD(1)?

Section 80CCD(1) deals with the deduction available for individual taxpayers’ contributions towards their own NPS account. This includes contributions made by the taxpayer, whether salaried or self-employed, towards their Tier-I NPS account.

Key Features and Benefits of Section 80CCD(1)

Section 80CCD(1) of the Income Tax Act, 1961 is a significant provision allowing taxpayers to save on taxes. Its benefits are as follows:

Deduction Limit

As per the current provisions, individuals can claim a deduction of up to 10% of their salary (for salaried individuals) or 20% of their gross total income (for self-employed individuals) under Section 80CCD(1).

Overall Limit

The deduction under Section 80CCD(1) is within the overall limit of ₹1.5 lakhs available under Section 80CCE, which includes various other deductions like Section 80C, 80CCC, etc.

Additional Deduction for Self-Employed

Self-employed individuals can benefit from a higher deduction of 20% of their gross total income, providing them with an increased scope for tax savings.

Voluntary Contributions

Taxpayers can also make voluntary contributions beyond the mandatory contribution towards NPS, increasing their tax benefits.

What is Section 80CCD(2)?

Section 80CCD(2) pertains to the deduction available for employer contributions to an employee’s NPS account. This applies to salaried and self-employed individuals who employ others and contribute to their employees’ NPS accounts.

Key Features and Benefits of Section 80CCD(2)

Section 80CCD(2) is a crucial component of this framework, providing tax benefits to employees and employers. Some of the features and benefits are as follows:

Employer Contribution

Employers contributing to their employees’ NPS accounts can claim a deduction under Section 80CCD(2). The deduction is available for up to 10% of the employee’s salary, which includes basic salary and dearness allowance.

No Monetary Limit

Unlike Section 80CCD(1), no monetary limit is prescribed for the deduction under Section 80CCD(2). Employers can claim the entire employer contribution as a deduction.

Employee Eligibility

The employee does not need to contribute to their NPS account to avail the benefit under Section 80CCD(2). However, the deduction claimed by the employer is part of the overall limit of ₹1.5 lakhs available under Section 80CCE.

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

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

Sections of IT Act, 1961

Tax Deduction

Details Tax Benefits

Section 80CCD (1)

Contributions 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 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 by an individual to their NPS/ Atal Pension Yojana account

Up to ₹50,000

Section 80C

Investments made into tax-saving instruments

Up to ₹1.5 lakhs

Section 80CCC

Investments made into retirement plans

Up to ₹1.5 lakhs

Conditions for Deductions Under Section 80CCD of Income Tax Act, 1961

Taxpayers can optimize their tax planning and secure their financial future by fulfilling the specified conditions.

  • Under Section 80CCD, deductions can be claimed by both salaried and self-employed people. While it is obligatory for government employees, it is voluntary for other individuals.
  • ₹2 lakhs is the 80CCD (2) maximum limit can be claimed under the section. It contains the additional deduction of ₹50,000 that is available under 80CCD (1B).
  • Tax benefits under Section 80CCD cannot be claimed again under the Income Tax Act’s Section 80C. Simply put, the merged deduction under Section 80C and Section 80CCD can be at most ₹2 lakhs.
  • The money that has been received from the National Pension Scheme as monthly payments or surrendered accounts will be taxed according to the pertinent tax provisions.
  • If any amount that has been received from the National Pension Scheme is reinvested in the annuity plan, it will be completely exempt from tax. The deductions that can be claimed under Section 80CCD would be available for the claim at the end of the financial year when a person files the tax returns.

Things to Keep in Mind

  • The limit given in Section 80CCD income tax deduction in part (1) is to be read along with Section 80C and Section 80CCC. All these three sections together offer a tax relief of ₹1.5 lakhs.
  • Say you invested ₹1 lakh in 80C and 1 lakh for an 80CCD deduction in part 1; the total benefit you will get from these two investments is ₹1.5 lakhs only, not ₹2 lakhs.
  • Section 80CCD 2 deduction is for employer contribution, and 80CCD 1 is for employee contribution.
  • You can be an employee or self-employed as well.

Final Thoughts

Understanding the nuances of Section 80CCD(1) and 80CCD(2) is crucial for individuals looking to optimize their tax planning through the National Pension System. While Section 80CCD(1) focuses on individual contributions to their NPS account, Section 80CCD(2) highlights the employer’s role in facilitating employee tax benefits. By leveraging these provisions, taxpayers can save on taxes and secure their financial future through contributions to the NPS. It is advisable to consult with a tax professional to ensure proper compliance with tax laws and to make informed decisions based on individual financial situations.

Key takeaways

  • Taxpayers can claim a deduction of up to 10% of their salary (for salaried individuals) or 20% of their gross total income (for self-employed individuals) under Section 80CCD(1).
  • The deduction under Section 80CCD(1) is within the overall limit of ₹1.5 lakhs available under Section 80CCE.
  • Individuals can make voluntary contributions beyond the mandatory ones, providing an avenue for increased tax benefits under Section 80CCD(1).
  • Section 80CCD(2) allows employers to claim deductions for contributions made on behalf of employees to their Tier-I NPS accounts.
  • Unlike Section 80CCD(1), there is no monetary limit for the deduction under Section 80CCD(2), allowing employers to claim the entire contribution.

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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