Section 80CCD- New Pension Scheme Tax Benefits

When an individual contributes towards the central government’s notified pension scheme, i.e., New Pension Scheme, he/she can claim income tax deductions under Section 80CCD of the Income Tax Act, 1961. Furthermore, the contributions made by employers on behalf of their employees towards the National Pension Scheme also come under the purview of this section.

Read on to understand the tax benefits under Section 80CCD.

Launched by the government, the New Pension Scheme is a pension plan managed by the Pension Fund Regulatory and Development Authority (PFRDA). It was launched in order to help individuals build a retirement corpus. This scheme is also known as the National Pension Scheme. Any individual, non-resident or resident, between 18-60 years of age, is allowed to invest in this scheme.

The scheme has two tiers-

  • NPS Tier 1

NPS Tier 1 is for building a retirement corpus. Therefore, NPS Tier 1 doesn’t allow withdrawal. At the end of the maturity period, investors can withdraw 60% of the maturity fund, and the rest of the maturity amount is converted into annuity.

  • NPS Tier 2

Only NPS Tier 1 investors can invest in NPS Tier 2. There are no restrictions on the withdrawal.

Tax Benefits of Investing in New Pension Scheme

Section 80CCD (1)

All taxpayers who contribute to the National Pension Scheme are allowed to claim tax deductions under Section 80CCD (1) of the Income Tax Act, 1961. This deduction can be availed by salaried employees as well as self-employed individuals.

Let’s take a look at tax benefits under this section-

  • The maximum tax deduction allowed to an individual is Rs. 1.5 Lakh.
  • In case of a salaried person, the maximum tax deduction permissible is 10% of the annual salary (Basic + Dearness allowance).
  • In case of a self-employed person, the maximum tax deduction permissible is 20% of the gross income.

Section 80CCD (2)

An employer’s contributions on behalf of employees to National Pension Scheme come under the provision of Section 80CCD (2).

Employer contributions can be made in three ways-

  • An employer can contribute an amount that is equal to the employee’s contribution.
  • An employer can contribute an amount that is higher or lower than the employee’s contribution.
  • Only the employer is also allowed to contribute on behalf of an employee.

The least of the below three conditions determine the maximum deduction amount-

  • 10% of a person’s annual salary. (basic + dearness allowance)
  • Contributions made by the employer.
  • Gross total income.

Section 80CCD (1B)

Individuals are allowed to claim additional deduction benefit under this section. This section is applicable to salaried employees as well as self-employed individuals. Below are the tax benefits that can be availed under this section.

  • An individual can claim an additional tax deduction up to Rs. 50,000 for the contribution to National Pension Scheme under this section.
  • This deduction is allowed over and above the benefits of Section 80CCD (1).

Use a Pension Calculator to Determine Your Retirement Corpus

By investing in pension plans like the National Pension Scheme, you can secure your life after retirement. Furthermore, if you want to find out an ideal retirement corpus, then use a pension calculator. A pension calculator calculates the retirement corpus based on your age, desired retirement age, current income, expenses, etc.