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.
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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.