Deductions under Section 80CCD(1B)- National Pension Scheme

Deductions under Section 80CCD(1B)

• Here are some of the critical points about Section 80CCD(1B) that you should be aware of.
• The additional deduction of Rs. 50,000/- is available only for contributions made to NPS Tier 1 accounts.
• Tier 2 accounts are not eligible to claim the deduction under Section 80CCD(1B).
• The deductions under Section 80CCD(1B) are available to salaried individuals as well as to self-employed individuals.
• You need to produce documentary evidence of the transaction related to the contribution to NPS
• Partial withdrawals are allowed under NPS but are subject to specific terms and conditions
• The total exemption limit under Section 80CCD(1B) is Rs. 50,000/– and is independent of exemptions under Sec 80 C. Thereby, you can claim a maximum deduction of Rs. 2,00,000/-
• In case the assessee dies, and the nominee decides to close the NPS account, then the amount received by nominee is exempt from taxation
• If partial withdrawals are made from the account, then only 25% of the contribution made is exempt from taxation.
• If the assessee is an employee and decides to close the NPS account or opt out of NPS, then only 40% of the total amount is tax-exempt.
• The assessee can withdraw 60% of the entire amount on reaching the age of 60 years as tax-free income. The remaining 40% is also tax-free if it is used to purchase an annuity plan. Section 80CCD(1B) offers you an excellent opportunity to save a substantial amount on your taxation liabilities. This way you can not only reduce your present tax liabilities but also work towards creating a substantial corpus for your retirement. Do keep in mind the points mentioned above, before taking any action related to your NPS account regarding Section 80CCD(1B).

Tier 1 Account: This has a fixed lock-in period until the subscriber reaches the age of 60 years. Only partial withdrawal is allowed, with certain conditions. Contributions made towards Tier 1 are tax deductible and qualify for deductions under Section 80CCD(1) and Section 80CCD(1B). This means you can invest up to Rs. 2 lakh in an NPS Tier 1 account and claim a deduction for the full amount, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Section 80CCD(1B).

Tier 2 Account: This is necessarily a voluntary savings account which allows the subscribers to make withdrawals as and when they like. But the contribution made to a Tier 2 account is not eligible for tax deduction. To open a Tier 2 account, you must open a Tier 1 account first. Contribution to NPS now qualifies under the exempt-exempt-exempt (EEE) mode of taxation wherein the amount contributed to NPS, the income generated and the amount of maturity, are all tax-exempt. As per the latest guidelines, you can withdraw up to 60% of the amount on maturity and need to reinvest the remaining 40% to purchase an annuity that gives you a regular monthly income.

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