Section 80CCD (1) and 80CCD(2)-| North Loop Official Blog
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17 Dec 2020

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

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What is section 80CCD?

The Income Tax Act has special provisions for employers and employees (or individuals) making contributions towards the National Pension Scheme (NPS), an initiative of the Central Government. The NPS scheme, which was previously meant only for government sector employees, can now be availed by the Private sector employees as well as self-employed individuals. Deductions under the National Pension Scheme section 80CCD of the income tax act are some of the most popular deductions available.

The Pension Regulatory Fund Authority of India regulates National Pension Scheme, and investments are made into equity and debt instruments. The main objective of NPS is to help individuals build up a large retirement corpus and receive a monthly pension, which can help them tide through their post-retirement life.

NPS has a limit of 50-75% equity exposure for non-government and a 50% equity exposure limit for government employees, the remaining of which is invested in debt-based instruments. There are two ways through which your investments in NPS are handled-

1. Active Choice- Through an active choice mode, you get to decide your portfolio allocation into equities and debt instruments. There is currently a 75% threshold on the amount invested in equities, which gradually reduces by 2.5% once you turn 50.

2. Auto Choice- Through the auto choice mode of portfolio allocation, the decision is made automatically on your behalf depending on your risk tolerance. There are 3 types of choices in auto choice mode- aggressive, moderate, and conservative and investments are made in line with your risk appetite.

What is Section 80CCD (1)-

Section 80CCD(1) deals with deductions for contributions made by employees (government and non-government) and self-employed individuals towards the National Pension Scheme. This provision can be availed by Indian residents as well as NRIs who fulfill the above criteria, between the ages of 18 and 60.

The maximum deduction a government or non-government employee can claim is 10% of their salary in the previous year. The salary considered in this case is (basic pay plus Dearness Allowance).
In the case of self-employed individuals, the maximum deduction that can be claimed is 20% of the gross total income in the previous year (up to Rs. 1.5 Lakhs).

In-line with The Financial Act, 2015, Section 80CCD(1B) qualifies Salaried employees and self-employed individuals for an additional deduction. Under Section 80CCD(1B), you can claim an additional deduction of up to Rs. 50,000, above and beyond the Rs. 1.5 Lakhs worth of deductions that you can claim under Section 80CCD(1). This deduction can be claimed only on contributions made towards NPS.

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What is Section 80CCD(2)-

Section 80CCD(2) deals with deductions for contributions made by employers towards an employee’s National Pension Scheme account. The maximum deduction an employer can claim under Section 80CCD(2) is 10% of the employee’s salary in the previous year. This section is, however, only meant for salaried employees and not self-employed individuals.

Things to take into account while claiming deductions under section 80CCD-

You can only claim a maximum deduction of Rs. 2 Lakhs under this section and this includes the additional deduction under section 80CCD(1B). The deductions combined under Section 80C and Section 80CCD must not cross Rs. 2 Lakhs per annum and. Sec 80CCD (1) is meant only for contributions from employees and self-employed individuals while Sec 80CCD(2) is meant for employer contributions.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.