How to Use Section 80CCD For Tax Exemption of Extra 50000 Rupees

If you are looking for a way to reduce your tax burden, Government of India announced a way to claim the tax deduction for an extra 50000 rupees from your taxable income. So far the exemption anyone could claim by using the Income Tax Act section 80C and 80CCC combined was 150000 in a financial year. Now under Income Tax Act section 80CCD(1b), you can claim Income exemption for addition 50000 Indian Rupees. All you have to do is to invest 50000 rupees to National Pension Scheme (NPS) and show it under section 80CCD once the combined investment limit under Sections 80C and 80CCC are exhausted at the amount of 150000 rupees in a financial year. This extra 50000 rupees tax exemption can be claimed by anyone in any tax slabs.

How to Claim Tax Exemption Under Section 80CCD

Though there are some confusions remain in how to take benefit from Section 80CCD in Indian Income Tax Act, by carefully planned investments you can take full benefits of Tax exemption allowed by Section 80CCD. While computing your Tax returns, one point you must remember is to avoid duplication. That is if you have claimed your investments in NPS under section 80C, you cannot use the same amount for tax exemption under section 80CCD. So you must use the following procedure if you want to claim section 80CCD. Easy procedure to claim Tax Exemption for Extra 50000 rupees under Income Tax Act 1961 Section 80CCD is:
  1. Calculate your taxable income for the current financial year

  2. Deduct all expenses related to your business from the income under Business and Profession

  3. Make sure all investments under section 80C are added up to 1.5 lakhs. Here you should consider your investments in Employee Provident Fund (EPF), Public Provident Fund (PPF), Tax Saving Mutual Fund Schemes (ELSS), Tax Saving Fixed deposits with five years locked in period etc. It is better you should not show your investments in NPS under section 80C unless you have invested enough money in NPS to claim section 80CCD too. It is important to note that even if you use the benefits of sections 80C and 80CCC, 1.5 lakhs is the upper limit.

  4. Show your investments in NPS tier-1 up to 50000 under section 80CCD(1b)
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Points to Remember Before Investing NPS to Claim Section 80CCD

Congratulation to all who are planning to take benefits of Section 80CCD to claim tax exemption for another 50000 rupees. However, I would like to remember you a few points before you invest in NPS for the sole purpose of Tax Exemption.
  • NPS has two different accounts: tier 1 and tier 2. Only the investment to NPS tier 1 account is tax exempted.
  • National Pension Scheme tier 1 account is for retirement purpose. That means withdrawal from tier 1 account has certain restrictions.
  • Any withdrawal from NPS tier 1 account attracts Tax burden. You must pay tax at the time of withdrawal, once the account is matured, at the rate of your tax slab.
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Usage of Section 80CCD For Government Employees

Now let us consider the case of both Central Government and State Government employees who are contributing to NPS tier-1. For Government employees, it is mandatory to contribute a certain amount to NPS tier-1 and a matching amount (10% of Basics + DA) will be contributed by Government. Now the question is whether a Government employee can claim his mandatory contribution to NPS for additional tax exemption for 50000 rupees per year. The answer is yes. See the chart below to understand how to use section 80CCD by a Government employee to reduce his tax burden legally.
Section 80CCD(1)10% of Basics and DAUp to 1.5 lakhs is tax exempted (clubbed with Section 80C)
Section 80CCD(1b)Contribution to NPS tier-1 account up to 50000 rupeesExtra Tax exemption for 50000 Rupees (in addition to the section 80C)
Section 80CCD(2)Government contribution up to 10% of Basics + DA Additional Tax Exemption (not clubbed with Section 80C)
So if you are a government staff who is trying to make maximum tax benefits using section 80C and Section 80CCD, follow the tips below.
  • Government contribution {Section 80CCD(2) }upto 10% of Basic plus DA is fully exempted
  • Show your contributions up to 50000 to NPS tier-1 account under Section 80CCD(1b)
  • Any remaining contribution to NPS tier-1 should show under Section 80CCD(1) which will be clubbed with Section 80C up to max 1.5 lakhs limit