Section 80CCD(1B) – Exemptions Available Under Section 80CCD(1B) of Income Tax

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Every taxpayer in India has to pay taxes on their income. However, the Income Tax Act offers various options to avail of exemptions in different sections to reduce the burden of tax liabilities on taxpayers. This can be done by investing in several schemes and policies. NPS, or the National Pension System, offers the option to lower your tax burden under section 80CCD(1B) for up to INR 50,000 by investing in the scheme. Let’s discuss more on 80CCB(1B) exemptions and the NPS details in this post.

What Does Section 80CCD (1B) Suggest?

Section 80CCD1B of the Income Tax Act is a special provision for taxpayers to claim an additional tax deduction beyond the limits prescribed under section 80C. Section 80CCD(1B) was included under the sphere of the 80CCD section of the IT Act in April 2016. This provision makes taxpayers eligible to claim tax exemptions of up to INR 50,000 for their NPS contributions. The Section 80CCD(1B) deduction is offered above the INR 1.5 lakh tax benefit available under Section 80C + 80CCC + 80CCD (1). Thus, the total deduction you can avail of will be INR 2 lakh, including Section 80C + 80CCC + 80CCD (1) and 80CCD (1B).

For example, suppose you buy policies, invest up to INR 1.5 lakh u/s 80C, and contribute INR 50,000 on NPS annually. Now, you can claim a tax deduction of up to INR 2 lakh, including section 80C and section 80CCD(1B). However, if you invest beyond INR 50,000, the deduction available u/s 80CCD(1B) is up to INR 50,000 only.

Who Are Eligible to Claim Deductions Under Section 80CCD (IB)?

Any individual, including salaried or self-employed, can claim deductions under section 80CCD (1B). However, you may note that an age restriction is available for opening an NPS account, as mentioned below:

Resident individuals – 18 to 70 years of age

NRIs or Non-Resident Indians – 18 to 70 years of age (in case the citizenship of the NRI changes after the NPS investment, the account will terminate)

What is NPS or National Pension Scheme?

NPS is a long-term and voluntary retirement savings scheme backed by the government that allows investors to have systematic retirement savings. Salaried and self-employed people can invest in NPS, which is administered by PFRDA or the Pension Fund Regulatory and Development Authority. The scheme aims to provide financial security to investors after their retirement.

NPS offers double benefits:

  • It supports tax saving during your tenure of employment
  • It allows a regular stream of income after retirement

Thus, NPS allows individuals to build a corpus for retirement along with offering a regular income every month. Returns under NPS are likely among the highest available.

NPS Accounts Types

Below are the two kinds of NPS accounts available:

  • NPS Tier 1
  • NPS Tier 2

1. NPS Tier 1:

This is the Pension Account with a fixed lock-in tenure that lasts until the applicant turns 60 years. Here, the investor can withdraw partial amounts during the lock-in period, and that too under certain circumstances. The contribution made towards this account allows tax deduction under Section 80CCD (1) and Section 80CCD (1B).

2. NPS Tier 2:

This is an additional account, which is a savings account under which the investor can withdraw funds as needed. Here, the tax deduction is available only to employees working under the central government. However, to have a tier 2 account, it is necessary to have a tier 1 account. NPS contributions are eligible for EEE or exempt-exempt-exempt mode of taxation. Hence, NPS contributions, the income earned from NPS, as well as the maturity amount are all exempted from tax.

The latest guideline on NPS says that a subscriber can draw up to 60% of the accumulated amount at the time of maturity, while the remaining 40% is reinvested to obtain an annuity for regular monthly pay.

How to Avail Tax Benefits by Investing in NPS?

To be able to avail of NPS tax benefits by investing in the NPS scheme, you can initiate the process online or offline. You can visit the NSDL e-Gov portal, now known as Protean, to open an NPS account. Alternatively, you may get it done offline via any financial establishment substituting as a POP or Point of Presence. POPs can be authorized banks or through NBFCs.

Documents Needed to Claim NPS Benefits Under 80CCD (IB)

A subscriber requires the following documents for investing in NPS:

  • Bank account statement as proof of investment
  • PAN card
  • Aadhaar card

Withdrawal and Annuity Rules Under NPS

When the investor/subscriber of an NPS account turns 60, the person becomes eligible to withdraw 60% of the accumulated corpus, while the remaining 40% can be turned into an annuity plan. Further, there is no tax imposed on the 60% of the corpus that is withdrawn at maturity. On the other hand, the remaining 40% offered as annuity is taxable.

In the event of premature withdrawal, 20% of the corpus is allowed to withdraw, which is again taxable. The remaining 80% is paid as an annuity plan after retirement, again taxable. Hence, both premature withdrawal and annuity amounts are taxable in such cases.

PERDA, or Pension Fund Regulatory and Development Authority of India, prescribes specific guidelines for premature withdrawal, and it is not allowed under regular circumstances.

Hence, a subscriber can withdraw NPS funds prematurely only under specific conditions of medical emergencies, marriage of children, etc.

Points to Consider While Claiming Section 80CCD (IB) Deductions

Here are some significant things to know about 80CCD (1B):

  • Subscribers can avail of the INR 50,000 deduction available under 80CCD (1B) for contributing funds to the NPS Tier 1 account.
  • However, one cannot claim deductions under NPS Tier 2 accounts as they do not qualify for claims u/s 80CCD(1B).
  • Both salaried employees and self-employed people can claim deductions under 80CCD (1B).
  • Evidence in the form of transaction documents showing contributions done to NPS is required to claim deductions.
  • NPS allows partial withdrawals to subscribers subject to certain conditions.
  • INR 50,000 is the total deduction limit available under 80CCD(1B). This exemption is not related to the deductions offered under section 80C of the IT Act. This makes the maximum amount to be claimed INR 2 lakh.
  • If the nominee closes the NPS account after the subscriber dies, the accumulated funds obtained by the nominee will be exempted from taxation.

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FAQs: Deductions under Section 80CCD(1B) of Income Tax?

What is section 80CCD (2) associated with?

Under Section 80CCD (2), the deduction is available on the employer's contribution to NPS.

What is the National Pension Scheme 80CCD?

Section 80CCD relates to the deductions offered to employees against contributions made towards NPS and APY or Atal Pension Yojana.

NPS deduction is available under which section?

The NPS deduction section is section 80 CCD, and it is associated with deductions against contributions made towards NPS.

What are the National Pension Scheme tax benefits?

National Pension Scheme 80CCD (1B) allows a tax deduction of up to INR 50,000 in NPS (Tier I account).

Who regulates the NPS or National Pension Scheme?

NPS is regulated by PFRDA or the Pension Fund Regulatory and Development Authority under the guidance of the government.

Can deduction under Section 80CCD(1B) be claimed by anyone?

No, deductions under section 80CCD (1B) cannot be claimed by Hindu Undivided Families, Persons of Indian Origin, as well as Overseas Citizens of India.

Does the NPS scheme have a lock-in period?

Yes, NPS has a lock-in period. The scheme matures when a subscriber attains 60 years of age. So, till 60 years old, the scheme cannot be withdrawn. A subscriber can withdraw 20% of the corpus as a premature withdrawal under extreme conditions. Once the subscriber reaches retirement age, they can have 60% of the accumulated corpus as a lump sum amount. The remaining 40% can be availed as annuity payments.

Does Section 80CCD (1B) apply to NPS only?

Yes, Section 80 CCD (1B) applies only to investments made towards NPS.

Is opting for annuity payments necessary under NPS?

Yes, the entire concept of NPS is to provide regular income to the subscriber after retirement. Hence, availing of annuity payments is mandatory.

How to make contributions towards NPS?

Once an NPS account is opened, you must follow the below rules to keep your account active.
~ You must maintain a minimum yearly contribution of INR 1,000
~ INR 500 is the minimum contribution each time you add money to the scheme
~ One contribution per year is a must
~ You need to regularly contribute annually till you attain 60 years of age

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Feb 01, 2024
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PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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