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How to save tax on additional 50,000 income under section 80CCD (1B)

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How to save tax on additional 50,000 income under section 80CCD (1B)
April 08, 2019

Income tax in India comes under the purview of direct taxation, as regulated and governed under the guidelines of CBDT (Central Board of Direct Taxes). Being a very extensive and elaborate mechanism, taxation and the specific points of exemption under it are directly governed by specified sections under the Income Tax Act, 1961. One of the main Sections for allowing exemptions comes under the purview of Section 80C of the Income Tax Act under which exemptions on payable investments towards pre-listed instruments are defined. One of the ways in which tax-exemption on additional Rs 50000 income can be claimed under Section 80CCD (1B) is by investment in NPS. NPS or National Pension Scheme is a government-backed annuity instrument which can be availed by any eligible citizen of India. It was launched in 2005, with a view towards enabling annuity-outreach for government employees. However, later its scope was widened to include works from all sectors including those from unorganized sectors as well.

NPS account is mandated to be set up in two tiers tier I and tier II. Tier I account is the primary account that is compulsorily meant to be an annuity investment and the withdrawal is not allowed until the account holder attains the age of 60 years (i.e. retirement). The minimum contribution towards an NPS account is Rs 6000 in a given financial year, with a minimum requirement of Rs. 500 in any single contribution. Therefore, the benefits of NPS investment can be availed of by all the sections of the society. 60% of the accumulated corpus in tier I account is mandated to be used for purchasing annuity. On the other hand, a tier-II account serves as a normal bank savings account from which partial withdrawals can be made as per the convenience of the policy holder.

Under Section 80C, a maximum of Rs 150000 in any given financial year is eligible for tax exemption. However, with NPS investment, there is an additional benefit which allows exemption on Rs. 50000 over and above the eligible exemption on Rs 150000. Under Section 80CCD (1B), the contribution made towards NPS is eligible for an additional exemption with an upper capping of Rs. 50000. This means that the contribution towards NPS is eligible for an extra exemption on Rs. 50000. However, it must be kept in mind that this Section allows exemption with a focus on the annuity instrument and respective benefits. Therefore, only the contribution to tier I account is eligible for this exemption.

Section 80CCD (1B), therefore covers only the contributions made to tier I account. The contributions made towards tier II account are not eligible for any such exemption and the tier II account simply functions as a savings account without any exemptions as such.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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