Did you know NPS offers tax benefits beyond the standard ₹1.5 lakh deduction? Section 80CCD of the Income Tax Act provides deductions for contributions made to the National Pension System (NPS) — a voluntary retirement savings scheme regulated by PFRDA. It encourages systematic savings for retirement during an individual’s working life.
The deductions under 80CCD are classified into three categories:
· 80CCD(1): Employee or self-contributions
· 80CCD(1B): Additional voluntary contributions
· 80CCD(2): Employer contributions
Each comes with its limits and benefits. Let’s understand each in detail.
Understanding 80CCD(1): Your contributions to NPS
This section allows you to claim deductions on the contributions you make to your NPS Tier I account.
Who can claim:
· Salaried employees
· Self-employed individuals
How much can you claim:
· Salaried: Up to 10% of salary (Basic + DA)
· Self-employed: Up to 20% of gross total income
However, the deduction claimed under 80CCD(1) is part of the overall ₹1.5 lakh limit under Section 80C. So, if you've already exhausted that limit with other investments, this won't give you additional tax relief. Still, it’s a valid option if you’ve yet to reach the ₹1.5 lakh cap.
What is 80CCD(1B): Additional ₹50,000 tax deduction
This is where NPS becomes even more attractive. Introduced in Budget 2015, Section 80CCD(1B) offers an exclusive additional deduction of ₹50,000 over and above the Section 80C limit.
Key points:
· Available to both salaried and self-employed individuals
· Applies only to Tier I NPS contributions
· Not linked to the 80C ₹1.5 lakh limit
If you’ve already maxed out your 80C investments, this section gives you the flexibility to reduce your tax liability further. By contributing ₹50,000 annually to NPS under 80CCD(1B), you could save up to ₹15,600 in taxes (assuming you’re in the 30% bracket).
For tips on long-term financial planning, check out this helpful Future Generali blog on retirement planning.
How employer contributions under 80CCD(2) benefit you
If your employer contributes to your NPS account, that amount is also eligible for tax deduction, but under Section 80CCD(2).
Who can claim:
· Only salaried employees (not applicable to self-employed)
Limits:
· Government employees: Up to 14% of salary (Basic + DA)
· Private sector employees: Up to 10% of salary (Basic + DA)
Here’s the best part: This deduction is over and above both the ₹1.5 lakh 80C limit and the ₹50,000 under 80CCD(1B).
So, if your employer contributes ₹80,000 annually to your NPS, you can deduct that amount from your taxable income, too. It’s worth checking with your HR to see if this benefit is already available to you — or to suggest adding it to your salary structure.
You can read more about tax-saving employee benefits on Generali Central
Quick recap: How much can you save in total?
Let’s assume the following scenario for a salaried employee earning ₹10 lakhs annually:
Contribution Type
|
Deduction Section
|
Amount
|
Employee contribution (under ₹1.5L)
|
80CCD(1)
|
₹1,50,000
|
Additional voluntary contribution
|
80CCD(1B)
|
₹50,000
|
Employer contribution (10%)
|
80CCD(2)
|
₹1,00,000
|
Total possible deduction
|
|
₹3,00,000
|
That’s ₹3 lakh of total deductions, significantly reducing your taxable income and helping you plan for retirement at the same time.
Tax implications on NPS withdrawals
While saving tax today is great, you must also understand the taxation of NPS when you withdraw:
· On retirement: 60% of the corpus is tax-free. The remaining 40% is used to buy an annuity, which gives regular pension income (this portion is taxable).
· Partial withdrawals: Up to 25% of your contributions are allowed (for reasons like illness, education, or home purchase), and this amount is tax-free.
· On death: The nominee receives the full amount tax-free.
Planning your withdrawal wisely can reduce your future tax burden, too.
Eligibility for claiming tax deduction under 80CCD
You can claim a tax deduction under 80CCD if:
· You are an Indian resident or NRI
· You are between 18 and 70 years of age
· You have an active NPS Tier I account
Even students and first-time earners can open an NPS account. The process is fully digital through the eNPS portal.
How to start investing in NPS
You can open an account via:
· eNPS portal
· Authorised banks and post offices
· Offline via POPs (Points of Presence)
Once registered, you’ll get a PRAN (Permanent Retirement Account Number) and can start contributing instantly. You can choose between Auto or Active asset allocation and select fund managers. And remember — the sooner you start, the more you benefit from compounding.
Don’t overlook your health while planning your taxes
While you’re making smart investment decisions like contributing to NPS and claiming benefits under Section 80CCD, don’t forget to safeguard your most valuable asset — your health.
Medical emergencies can drain your savings, disrupt your long-term financial plans, and delay retirement goals. That’s why a comprehensive health insurance policy is essential, no matter your age or lifestyle.
Final thoughts
Section 80CCD is not just a tax-saving tool; it’s a long-term retirement planning opportunity. With a structured approach to your NPS contributions, you can enjoy tax deductions under 80CCD, reduce taxable income, and build a reliable retirement fund.
To summarise:
· Claim up to ₹2 lakh under 80CCD(1) + 80CCD(1B)
· Gain additional deductions via employer contributions under 80CCD(2)
· Benefit from long-term compounding and partial tax-free withdrawals
And while you plan for tomorrow, protect yourself today. A strong health insurance plan from Generali Central safeguards your finances during unexpected medical emergencies.
FAQs
1. Can I claim both 80CCD(1B) and 80CCD(2)?
Yes, both deductions are allowed separately — 80CCD(1B) for your contribution (₹50,000 extra) and 80CCD(2) for your employer’s share.
2. What’s the maximum deduction under Section 80CCD?
You can claim up to ₹2 lakhs via 80CCD(1) and 80CCD(1B), plus employer contributions under 80CCD(2), which have no fixed monetary cap but are subject to salary limits.
3. Is NPS Tier II eligible for 80CCD deduction? – H3 Tag
No, only investments made in Tier I NPS accounts qualify for tax benefits under Section 80CCD.
4. Who can claim 80CCD(2)?
Only salaried individuals whose employer contributes to their NPS account can claim deductions under 80CCD(2).
5. Are NPS withdrawals taxable?
Up to 60% of the NPS corpus is tax-free on maturity; the rest used for annuity is taxed as per your applicable slab.
