Section 80CCD(1) Under Income Tax Act: Tax Benefits on Your Own NPS Contribution in India

As part of India’s initiative to promote retirement security, the Income Tax Act, 1961, provides tax benefits for contributions to the National Pension System (NPS). Section 80CCD specifically deals with deductions for NPS contributions, and it is further divided into subsections covering different types of contributions.  

Section 80CCD(1) is the primary subsection that allows individuals to claim a deduction for their own contributions made to the NPS. Understanding this section is crucial for any individual investing in NPS to save for retirement and simultaneously reduce their taxable income.

What is Section 80CCD(1)? (The Concept)

Section 80CCD(1) provides a deduction from your Gross Total Income (GTI) for amounts you contribute from your income towards the National Pension System (NPS).  

• Gross Total Income (GTI): The total income calculated by summing up income under all five heads (Salaries, Income from House Property, PGBP, Capital Gains, Income from Other Sources), after setting off applicable losses.
• Deduction: An amount that is subtracted from GTI to arrive at Total Taxable Income.
• National Pension System (NPS): A government-backed, long-term retirement savings and investment product administered by the Pension Fund Regulatory and Development Authority (PFRDA).  

The core purpose of Section 80CCD(1) is to give individuals a tax incentive to save for their retirement through the structured framework of the NPS.

Who Can Claim Section 80CCD(1) Deduction?

The deduction under Section 80CCD(1) is available only to Individuals. This includes both:  

• Salaried Individuals: Employees receiving a salary.  
• Self-Employed Individuals: Those earning income from business or profession.  
• Assessee: A person (in this case, an individual) by whom tax is payable.

This deduction cannot be claimed by Hindu Undivided Families (HUFs), companies, firms, LLPs, or any other type of assessee.

The Eligible Contribution Under Section 80CCD(1)

To claim a deduction under Section 80CCD(1), the individual must have paid or deposited any amount during the previous year (PY 2024-25 for AY 2025-26) into their NPS Tier-I account.

• NPS Tier-I Account: This is the primary, long-term retirement savings account under NPS. Contributions are eligible for tax benefits, and withdrawals are subject to specific restrictions and tax rules at different stages.
• NPS Tier-II Account: This is a voluntary savings account alongside Tier-I, offering more flexibility in withdrawals. However, contributions to a Tier-II account are generally not eligible for deduction under Section 80CCD(1) (exceptions exist for certain government employees).
• Paid or Deposited: The contribution must have actually been made in cash or through banking channels during the relevant previous year.
• Out of Income: The contribution must be made from the individual’s income that is chargeable to tax.

The Limit Under Section 80CCD(1) & Its Link to 80C and 80CCC

Section 80CCD(1) has its own internal limit based on a percentage of the individual’s income:

• For Employees (Central Govt, State Govt, or Any Other Employer): The maximum deduction is limited to the lower of the amount contributed or 10% of their ‘Salary’.
  • Salary for this purpose means Basic Salary + Dearness Allowance (DA), but excludes all other allowances and perquisites.
• For Self-Employed Individuals: The maximum deduction is limited to the lower of the amount contributed or 20% of their Gross Total Income (GTI) (computed before any deduction under Chapter VI-A).  

However, the deduction claimed under Section 80CCD(1) is not independent. It is part of a larger combined limit pool defined by Section 80CCE.

Section 80CCE stipulates that the aggregate amount of deductions claimed by an individual under Section 80C + Section 80CCC + Section 80CCD(1) cannot exceed ₹ 1,50,000 for the previous year (PY 2024-25 for AY 2025-26).

Explanation:

• Overall Limit: The ₹ 1,50,000 is the total maximum deduction an individual can claim across all eligible investments and contributions falling under these three sections combined.
• If your eligible contributions/investments under 80C, 80CCC, and 80CCD(1) sum up to more than ₹ 1,50,000, your deduction under Section 80CCE will be restricted to ₹ 1,50,000. Within this ₹ 1.5 lakh limit, the deduction is first claimed under 80C, then 80CCC, and finally 80CCD(1), up to their individual limits (like the 10%/20% rule for 80CCD(1)).

Section 80CCD(1B): The Additional Deduction (₹50,000)

Recognizing the need for further incentivizing retirement savings through NPS, the Act introduced Section 80CCD(1B).  

• This section provides an additional deduction of up to ₹ 50,000 for contributions made by an individual to their NPS Tier-I account.
• Crucially, this ₹ 50,000 deduction under Section 80CCD(1B) is available over and above the ₹ 1,50,000 limit under Section 80CCE.
• Any contribution made to NPS Tier-I can first be claimed under Section 80CCD(1) (subject to the 10%/20% limits and the overall ₹ 1.5 lakh cap of Section 80CCE). Any remaining contribution can then be claimed for deduction under Section 80CCD(1B) up to ₹ 50,000.

Explanation:

• This effectively allows an individual to potentially claim a total deduction of up to ₹ 2,00,000 for their own contributions to NPS Tier-I (₹ 1,50,000 within 80CCE + ₹ 50,000 under 80CCD(1B)), assuming sufficient contribution and eligible income.

Taxability of NPS Withdrawal

The tax treatment of NPS withdrawals is crucial to understand:

• Withdrawal at Retirement (Age 60 or Superannuation): You can withdraw up to 60% of the accumulated corpus as a lump sum. This 60% is fully exempt from tax. The remaining minimum 40% must be used to purchase an annuity plan from an insurance company, and the periodic pension received from this annuity plan is fully taxable in the year of receipt.
• Partial Withdrawal: Under specific conditions (e.g., for higher education, medical treatment, house purchase), you can make partial withdrawals before retirement, limited to 25% of your own contributions. These partial withdrawals are fully exempt from tax.
• Withdrawal Before Retirement (Exit before age 60): If you exit NPS before age 60 (other than a partial withdrawal), generally, up to 20% of the corpus can be withdrawn as a lump sum, and the remaining 80% must be annuitized. The 20% lump sum withdrawal is taxable, while the pension from the 80% annuity is also taxable.  

This tax treatment is often described as EET (Exempt-Exempt-Taxable) for the annuity portion and EEE (Exempt-Exempt-Exempt) for the 60% lump sum and eligible partial withdrawals.

How to Claim Section 80CCD(1) & 80CCD(1B) Deduction

To claim these deductions:

• Ensure your contributions were made to your NPS Tier-I account during PY 2024-25.
• Report the amounts in your annual Income Tax Return (ITR) under the respective sections (80CCD(1) and 80CCD(1B)).  
• Maintain proof of contributions (transaction statements from your NPS POP – Point of Presence). If salaried, provide proof to your employer so they can reflect it in your Form 16 for TDS calculation.

Examples

Example 1: Contribution within 10% Salary Limit and within ₹1.5 Lakh

Ms. Sharma is an employee with Basic Salary + DA of ₹ 8,00,000 p.a. She contributes ₹ 70,000 to NPS Tier-I in PY 2024-25. She has no other investments under 80C or 80CCC.

• Contribution: ₹ 70,000
• 10% of Salary (Basic + DA): ₹ 8,00,000 * 10% = ₹ 80,000
• Limit under 80CCD(1): Lower of Contribution or 10% of Salary = Lower of ₹ 70,000 or ₹ 80,000 = ₹ 70,000.
• This ₹ 70,000 is within the ₹ 1.5 Lakh 80CCE limit.
• Ms. Sharma’s Deduction under Section 80CCD(1) = ₹ 70,000 (Claimed within the 80CCE limit).
• She has also utilized ₹ 70,000 out of the potential ₹ 1.5 lakh 80CCE limit.

Example 2: Contribution Exceeding 10% Salary Limit but within ₹1.5 Lakh

Mr. Gupta is an employee with Basic Salary + DA of ₹ 8,00,000 p.a. He contributes ₹ 90,000 to NPS Tier-I in PY 2024-25. He has no other investments under 80C or 80CCC.

• Contribution: ₹ 90,000
• 10% of Salary (Basic + DA): ₹ 80,000
• Limit under 80CCD(1): Lower of Contribution or 10% of Salary = Lower of ₹ 90,000 or ₹ 80,000 = ₹ 80,000.
• This ₹ 80,000 is within the ₹ 1.5 Lakh 80CCE limit.
• Mr. Gupta’s Deduction under Section 80CCD(1) = ₹ 80,000 (Claimed within the 80CCE limit).

Example 3: Utilizing the Additional ₹50,000 Deduction

Ms. Priya is a self-employed individual with GTI of ₹ 12,00,000 (before any Chapter VI-A deductions). She invests ₹ 1,50,000 in PPF (80C) and contributes ₹ 80,000 to NPS Tier-I (own contribution) in PY 2024-25.

• 80C Contribution: ₹ 1,50,000 (eligible for deduction up to ₹ 1.5L)
• 80CCD(1) Contribution: ₹ 80,000. Limit for self-employed is lower of contribution or 20% of GTI = Lower of ₹ 80,000 or 20% of ₹ 12,00,000 (₹ 2,40,000) = ₹ 80,000.
• 80CCE Limit Check: 80C eligible (₹1,50,000) + 80CCD(1) eligible (₹80,000) = ₹ 2,30,000. This exceeds the 80CCE limit of ₹ 1,50,000.
• Deduction under 80CCE: Capped at ₹ 1,50,000. This deduction will account for the full ₹ 1,50,000 from her 80C investment. (Note: Order of claiming within 80CCE matters, often 80C first).
• Remaining NPS Contribution: ₹ 80,000 (contributed) – ₹ 0 (claimed under 80CCD(1) within 80CCE after exhausting 80C) = ₹ 80,000. Correction based on common interpretation: The ₹80,000 NPS contribution is eligible under 80CCD(1), but its deduction is restricted by 80CCE. So, ₹80,000 is eligible under 80CCD(1), but only ₹0 will be claimed within 80CCE as 80C already hits the limit.
• Additional Deduction under 80CCD(1B): She can claim deduction for the NPS contribution under 80CCD(1B) up to ₹ 50,000, provided the contribution (₹ 80,000) was made.
• Ms. Priya’s Total Deduction:
  • Under 80CCE (from 80C + 80CCD(1)): ₹ 1,50,000
  • Under 80CCD(1B): ₹ 50,000  
  • Total Deduction = ₹ 1,50,000 + ₹ 50,000 = ₹ 2,00,000

📌Important Points to Remember about Section 80CCD(1)

• Eligible Assessee: Only Individuals.
• Eligible Investment: Contribution to your NPS Tier-I account.
• Limit under 80CCD(1): 10% of Salary (Basic+DA) for employees, 20% of GTI for self-employed, or actual contribution, whichever is less.
• Overall Limit (Section 80CCE): Deduction under 80CCD(1) is part of the ₹ 1,50,000 combined limit with Section 80C and Section 80CCC.  
• Additional Deduction (Section 80CCD(1B)): An additional deduction of up to ₹ 50,000 for NPS Tier-I is available over and above the ₹ 1.5 Lakh limit under 80CCE.  
• Withdrawal Taxability: Specific rules apply (e.g., 60% lump sum at 60 is exempt, pension is taxable).
• Proof Required: Maintain NPS contribution statements.
• Tax Regimes: For Assessment Year 2025-26 (relevant to Previous Year 2024-25) onwards, deductions under Section 80CCD(1) and Section 80CCD(1B) are NOT available if you choose to file your tax return under the default/New Tax Regime (Section 115BAC). These deductions can only be claimed if you opt out of Section 115BAC and choose to be taxed under the Old Tax Regime.

Conclusion

Section 80CCD(1), along with Section 80CCD(1B), provides significant tax incentives for individuals contributing to the NPS Tier-I account. While Section 80CCD(1) falls within the overall ₹ 1,50,000 limit of Section 80CCE (combining 80C, 80CCC, and 80CCD(1)), Section 80CCD(1B) offers an additional deduction of up to ₹ 50,000, potentially allowing a total deduction of up to ₹ 2,00,000 for your own NPS contributions. However, it is crucial to be aware of the specific percentage limits within 80CCD(1), the tax rules for NPS withdrawals, and importantly, the non-availability of these deductions under the default New Tax Regime (Section 115BAC) for AY 2025-26 onwards unless the old regime is opted for.  

For accurate tax planning and to determine the most beneficial tax regime for your specific retirement savings and income structure, consulting a qualified tax professional is highly recommended.