Section 80CCD of the Income Tax Act, 1961, allows individuals and employers to deduct contributions to the National Pension System (NPS) and the Atal Pension Yojana (APY). In the Union Budget 2024, the government increased the deduction against employers’ contributions to NPS from 10 to 14 per cent of an employee’s basic salary and dearness allowance. This increase applies only to taxpayers opting for the new tax regime under Section 115BAC.

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Section 80CCD has subsections 80CCD (1) and 80CCD (2), which deal with contributions from salaried employees and self-employed individuals to NPS and employers’ contributions towards NPS. Under the new tax regime, only specific exemptions and deductions are allowed.

What Does Section 80CCD (1) Specify?

Section 80CCD (1) outlines the deductions available to taxpayers aged 18 to 70, regardless of whether they are government or corporate employees, or self-employed. It allows a maximum deduction of 10 per centfrom a salaried employee.For self-employed, it is 20 per cent of theirgross total income. However, the maximum deduction limit is Rs 1.5 lakh in a financial year.

Section 80CCD(1B) provides an extra deduction of up to Rs 50,000 for contributions to NPS, provided they opt for the old tax regime. The combined deductions under Sections 80C, 80CCC, and 80CCD(1) is Rs 1.5 lakhand Rs 50,000 under Section 80CCD(1B), totalling Rs 2 lakh.

What Does Section 80 CCD (2) Of Income Tax Act Dictate?

Section 80CCD(2) allows a deduction on an employer’s contribution to NPS, which can be equal to or higher than the employee’s contribution. This deduction is applicable to salaried individuals and can be availed over and above those of Section 80CCD(1). Central or state government employers can claim a deduction of up to 14 per cent of an employee’s salary; other employers can now also claim a maximum deduction of 14 per cent, up from 10 per cent.

What Is NPS?

NPS is a government-backed pension scheme for Indian citizens. Initially intended for government employees, it was later opened for the private sector and self-employed individuals. NPS aims to help individuals create a retirement corpus and receive a fixed monthly pension. It is mandatory for central government employees and voluntary for others. Tax deductions are subject to contributions and investment ceiling. The scheme offers various investment options, allows partial withdrawals, and offers a lump-sum payout of up to 60 per cent of the fund at 60.

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APY and Section 80CCD

The APY is also a retirement-oriented government scheme that provides a monthly pension after retirement. It is open to investors aged 18-40. Premature withdrawals are allowed, and the pension amount ranges from Rs 1,000 to Rs 5,000 per month. APY offers tax deductions up to Rs 1.5 lakh, and an additional Rs 50,000 like NPS.Upon death, the spouse receives the pension. Self-employed individuals can claim a deduction of up to Rs 1.5 lakh for APY investments.