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Do we need to invest extra for claiming deduction under Section 80CCD(1B) ?

Welcome to second article / blog on Basics Of Income Tax in this blog we (VriddhiIndia) will talk about Sub Section 80CCD(1B) & 80CCD(2), Investment under these sub sections can be utilized to take tax rebate over & above Rs. 1.5 Lac.

Section 80CCD(1B)

Form our first blog on Basics Of Income Tax you must learned of this sub section 80CCD, under this sub section tax payer could invest in National Pension Scheme & Atal Pension Yojana to avail tax rebate. But today we dwell further into this section, 80CCD have three parts CCD(1), CCD(1B), CCD(2). CCD(1) is already discussed (in last blog & above also) in which employee’s contribution to NPS / APY account is considered for deduction.

80CCD(1B) was introduced in 2015, this section is most useful for enhancing our investment (tax saving) portfolio but it is least understood sub section. Under sub Section 80CCD(1B) individuals (employer / self-employed) can claim an additional deduction upto Rs. 50,000 by investing in National Pension Scheme (NPS) & raising your total rebate portfolio to Rs. 2 Lac.

You must be saying that few moment before I said that this section is least understood, but where is misunderstanding in it!. Ok, I will try to explain you this by an example.

Mr Vinay is a school teacher he teaches Yoga in govt school & earn some X amount of salary. During march before 31st on some sunday, he sat on his study table with a objective of complete his FY 2019-20 investment planning; so that he can fill his IT returns on time. His idea behind this year investment is to get maximum rebate (at least Rs. 2 Lac) and to invest maximum money in high return instrument which will be free for withdrawal in shortest possible time (as he need same for some course which he planning to do next 2 to 3 years). His employer had already deducted Rs. 50 K for NPS (employee contribution) in this financial year, he has also term life insurance of Rs. 25 K and invested Rs. 25 K in PPF.

So to gain guidance he called his friend Mr. Hardeep and told his objective. Mr. Hardeep advised (Scenario 1) him to invest Rs. 50000 in ELSS  & Rs. 50000 in NPS (additional contribution which is over n above his regular NPS) as only 80CCD can allow him to save tax till Rs. 2 Lac. But this advice falls short of his basic requirement i.e. least possible lock-in period (as NPS is block till his retirement) with best returns.

Scenario 1 Scenario 2
Public Provident Fund (PPF) Rs. 25000 Public Provident Fund (PPF) Rs. 25000
Equity Link Saving Schemes (ELSS) Rs. 50000 Equity Link Saving Schemes (ELSS) Rs. 100000
Life Insurance Rs. 25000 Life Insurance Rs. 25000
National Pension Scheme (Employee Contribution) Rs. 50000 National Pension Scheme (Employee Contribution) Rs. 50000
National Pension Scheme (Additional Contribution) Rs. 50000 National Pension Scheme (Additional Contribution) Nil
Total Rs. 200000 Total   Rs. 200000

As Mr. Vinay was not satisfied he thought of calling some tax expert for same, he called Mr. Akash & explained his requirement. Mr. Akash advised him (Scenario 2) to invest Rs. 1 Lac in ELSS, on this Mr. Vinay ask him that if he invests Rs. 1 Lac in ELSS than his total contribution for deduction will stand at Rs. 1.5 Lac only. He further ask that he is informed that for taking rebate in Section 80CCD(1B) addition contribution is required apart from regular NPS contribution (employee contribution).

Mr. Akash explained him that in section 80CCD(1B) no where it is mentioned that to take tax rebate contribution should be over & above regular NPS contribution (employee contribution). It only say “no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1)” (Ref. Income Tax Site).

So in your case you have already invested Rs. 25 K in Life Insurance & Rs. 25 K PPF in totality Rs. 1 Lac & this new investment of Rs. 1 Lac in ELSS (MF) will complete your requirement of Section 80C (i.e. Rs. 1.5 Lac). And the amount you have already invested in NPS (employee contribution) i.e. Rs. 50 K could be filled (ITR) under section 80CCD(1B) for further rebate, leading to the total contribution of Rs. 2 Lac (for deduction). At the same time it will suffice your requirement of least lock-in period (as ELSS MF lock-in period is only 3 years) with best possible returns.

We have try to explain this topic with at most simplicity, if you still have any query please mention in comment section. Now we move to our other sub section i.e. 80CCD(2)    

Section 80CCD(2)

The provisions under sub section 80CCD(2) come into effect when an employer is contributing to the NPS of an employee (so not for self-employees). Remember contribution toward NPS is in addition to those made towards PPF and EPF. The deductions under this Section can be availed over and above those under Section 80CCD(1) (or 80C in general). Section 80CCD(2) allows salaried individuals to claim deductions up to 10% of their salary which includes the basic pay and dearness allowance or is equal to the contributions made by the employer towards the NPS.

So in simple words if your (employee) contribution to NPS is less than 10% of your basic + DA than amount contributed by your employer (which must under IT law) could be utilize for deduction & can be filled under this section. Point which need to be remembered is that combined contribution of your part (under 80CCD(1)) & your employer (under 80CCD(2)) cannot be greater than 10% of your salary (basic + DA). Among 80CCD(1B) & 80CCD(2) former is more useful & common as there are rare chances that your own contribution to NPS is less than 10% of your salary (basic + DA). So this is all under this topic, we know it’s a heavy topic to understand & so if you have any query please feel free to be in touch with us through comments section. We will see you in our next blog segment on further sections.

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