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Introduction:

The Taxation Act of 1961 provides deductions and exemptions designed to reduce taxable income, thereby reducing personal tax liability These provisions allow deductions for investments in within a particular system or alongside certain types of debt. There is a separate exemption for contributions to National Pension Scheme (NPS) under Section 80CCD(1B). In this guide, we will provide a comprehensive overview of the National Pension Scheme along with the latest developments in NPS reduction and go deeper into this exemption.

Section 80CCD(1B):

Section 80CCD(1B) grants an additional deduction of up to Rs. 50,000 for contributions made to National Pension Scheme (NPS). This additional deduction  Rs. 50,000 is separate from the benefit of Rs. 1.50 lakh deduction available under Section 80CCD(1). Consequently, the combined maximum deduction limit stands at Rs. 2 lakhs under Section 80CCD(1) + Section 80CCD(1B). It’s important to note that deductions are accessible to individuals only upon opting out of the new tax regime under section 115BAC(1A).

Sections 80CCD(1B) and 80CCD(2) of the Income Tax Act entitle individuals to claim an additional deduction of Rs. 50,000 for their contribution to their NPS account. Consequently, this increases the maximum deduction limit to Rs. 2 lakh under Section 80CCD of ITA.

Eligibility for Section 80CCD (1B):

An individual taxpayer is eligible to apply for deduction under section 80CCD(1B) by filing income tax returns under the old tax regime.

• A person must be 18 years of age or over to claim a deduction under Section 80CCD.
• Citizens of India residing within and outside the Indian Territory are eligible for deduction under Section 80CCD.
• All individuals, whether employed by the public or private sector, or self-employed, are eligible to claim a deduction under this section.
• Hindu Undivided Families (HUFs) are not eligible for benefits under Section 80CCD.

Amount of Deduction:

The deduction limit under Section 80CCD(1B) increases to Rs. 50,000 . This deduction complements the simple deductions under sections 80C, 80CCC, and 80CCD(1) of the Income Tax Act, 1961. Consequently, the total deduction available to an individual taxpayer can be up to Rs . 2 lakh (Rs. 1.5 lakh under Section 80C and Rs. 50,000 under Section 80CCD(1B)).

Deductions and Limits:

The following points explain the deductions and restrictions prescribed under Section 80CCD of the Income Tax Act:

• An additional deduction of Rs. 50,000 is provided when a person makes a contribution to the national  Pension Fund under sub-section 1b of Section 80CCD, bringing the total deduction to Rs. 2 lakh per annum.
• Salaried employees are entitled to a deduction of up to 10% of their salary, which includes basic salary and dearness allowances.
• Central government employees are eligible for all their contributions to the National Pension Scheme (NPS) as tax deductions.
• Self-employed individuals have the right to claim a deduction of up to 20% of their gross income.
• The aggregate deduction limit for section 80C, 80CCC, 80CCD(1), and 80CCD(1B) is Rs. 2 lakhs

NPS Scheme:

The Government of India launched the National Pension Scheme (NPS) with the aim of creating a disciplined savings culture for the future. This program allows hard-working individuals to contribute a portion of their income to it, making it easier to build an investment portfolio that grows over time and acts as a nest egg for retirement

On retirement, NPS account holders are entitled to withdraw a certain amount and the balance is paid to them as pension.

Earlier, the National Pension Scheme was available only for central government employees. However, the Pension Fund Regulatory Development Authority (PFRDA) has extended the scheme to the general public. Individuals can now voluntarily enroll in the NPS, ensuring their secure future.

Types of NPS Accounts:

The accounts  in the National Pension Scheme is divided into two parts:

Tier 1 NPS Account :

Opening a Tier 1 account is a mandatory step to enroll in NPS. The account is specifically designed for retirement savings, and places several limits on withdrawals. Notably, withdrawals from Tier 1 accounts before age 60 are prohibited.

The minimum deposit under Tier 1 NPS account is Rs. 500 is required to sustain its operations, while an annual deposit of Rs. 1000 .

Tier 2 NPS Account

Unlike Tier 1 accounts, Tier 2 NPS accounts are voluntary or optional . You have the option to open a Tier 2 account simultaneously with a Tier 1 account or later. Withdrawals from these accounts are not governed by strict rules. Pensioners can contribute to or withdraw funds from the Tier 2 NPS account as per their convenience.

Tier 2 accounts require a minimum of Rs. 1000 is required. Unlike a Tier 1 account, there is no obligation to maintain a specific deposit to keep a Tier 2 account active.

Documents Required for Claiming:

You must have the following documents in order to claim the tax benefits.

• You need to have proof of investment and transaction statement.
• The receipt for contributions made to the Tier 1 account of NPS is accessible online through your NPS account.
• PAN Card
• Aadhaar Card

Benefits of Section 80CCD(1B):

Section 80CCD(1B) provides various benefits to individual taxpayers who contribute to the National Pension Scheme (NPS). These benefits include:

• The provision provides for an additional deduction of up to Rs. 50,000 for contributions to NPS, in addition to the deductions available under Sections 80C, 80CCC, and 80CCD(1) of the Income Tax Act, 1961 .
• The tax deduction provided by Section 80CCD(1B) can help taxpayers reduce their taxable income and consequently their tax liability.
• The National Pension Scheme (NPS) is a long-term retirement savings account, subsidized by taxpayers to help build corpus for retirement
• The returns earned on investments made towards the NPS are tax-free, enabling taxpayers to potentially achieve higher returns on their investments.
• NPS offers flexibility in investment strategies, allowing taxpayers to choose their preferred asset class based on their risk appetite.

Points to Consider for Section 80CCD(1B) :

Here are some important details you need to know in order to claim deduction under Section 80CCD (1B):

• Contributions to Tier I accounts are deductible under Section 80CCD (1B), while investments in Tier II accounts are not eligible for any deduction.
• Salaried and self-employed persons are eligible to claim deduction under Section 80CCD (1B).
• Please provide documentary evidence pertaining to the transaction regarding the contribution to NPS.
• Under NPS, partial withdrawals are allowed in specific cases.
• If the nominee chooses to close the NPS account if the assessee dies, the amount received by the nominee is tax-free

Conclusion:

Section 80CCD(1B) of the Income Tax Act provides an additional deduction for individual taxpayers who contribute to the National Pension Scheme (NPS). This program offers many benefits, helping taxpayers reduce their tax liability and build retirement at the same time. However, it is important to comply with the conditions for claiming this deduction to ensure that the eligibility criteria are met and to avoid any adverse tax consequences. Taxpayers are encouraged to consider investment in NPS and avail the tax benefits offered by Section 80CCD(1B).