With effect from April 1, 2016, section 80CCD 1B of the Income Tax Act was added to the scope of section 80 CCD. All people who are eligible for a tax deduction under section 80CCD 1 can claim an extra deduction of Rs 50,000 for their contributions to pension schemes, according to the Income Tax Act.

Who all are eligible for Section 80CCD 1B?

  • Employed
  • Self-employed
  • NRIs

Contributing to a pension fund program entitles you to tax benefits in three sections:

Section 80 CCD(1): 150,000 rupees Portion 80C contains this section. It’s important to note that section 80CCCD(1) must be read in conjunction with section 80C. Sections 80C, 80CCD (1), and 80CCC collectively have a tax deduction maximum of Rs 1.5 lakh, not separately.

Section 80 CCD(1B): The maximum for the 80CCD 1B is Rs 50,000. This is an added advantage.

Total Tax Benefit

You can claim a total tax advantage of Rs 2 lakh from your contributions to pension fund programs.

Section 80 CCD (1) + Section 80CCD1B = Rs 1.5 lakh + Rs 50,000.

Things to keep in mind

  • You would not be able to use any other tax incentives available under section 80 C if you invest the full Rs 1.5 lakh in NPS to claim the tax benefit under section 80 CCD (1).
  • Other tax advantages include the equity-linked savings scheme (ELSS), the public provident fund (PPF), and five-year fixed deposits, among others.
  • In 80CCD1B, you get an additional reward for NPS. It is in addition to the tax benefit offered under section 80 CCD 1 of the Internal Revenue Code. As previously stated, the 80CCD1B maximum is Rs 50,000.
  • As a result, section 80 CCD1 is a portion of section 80C and the upper limit of section 80CCC. The total benefit from all groups is Rs 1.5 lakh.

Read, also: Best ELSS Funds to Invest in 2021

Which is the pension fund scheme?

The National Pension Scheme (NPS) is the pension fund scheme discussed in the preceding sections. It is a federally notified retirement plan that provides us with tax benefits under several provisions of the Internal Revenue Code.

How does this scheme work?

Contribution:  Following the opening of your NPS account, you must adhere to various laws and regulations about the amount of money you must deposit. These are required in order for your account to remain active.

  • A minimum yearly payment of Rs 1,000 is required.
  • Each contribution should be a minimum of Rs 500.
  • Every year, you should make at least one contribution.

After then, you must continue to make yearly contributions until you reach the age of 60. Throughout the plan’s life, the pension accounts will invest in equities, government bonds, and company bonds.

You have a choice of:-

Active choice

You get to choose how much of your NPS account to put into the various assets. Throughout the term of your NPS account, you can adjust the allocation to equities and debt as needed. You have the opportunity to choose your allocation under Active Choice, but only until you reach the age of 50. For a 50-year-old subscriber, the maximum stock allocation is 75 percent. Following that, the upper ceiling for equity allocation is reduced by 2.5 percent each year.

Auto Choice

Your account adheres to government-mandated minimums and adjusts allocations based on your age. Under auto select, there are three settings to choose from. The contribution to equity and debt according to risk level is the differential between all life cycle modes. The danger level is thought to be higher in younger age groups than in older age groups. As a result, equity levels have been maintained at the highest levels among youthful age groups, and it has gradually decreased as a result, following the cycles outlined below.

  1. Aggressive life cycle mode
  2. Moderate life cycle mode
  3. Conservative Life Cycle Mode

The aggressive style has the largest equity levels, which gradually decrease in the moderate and cautious modes. The aggressive mode has the lowest debt investment levels, the moderate mode has a slightly higher level, and the conservative mode has the highest debt investment levels.

Withdrawal and Annuity Rules

As a result, when you reach the age of 60, you will have a corpus based on all of your yearly contributions. You can only withdraw 60% of that amount, and 40% of it must be invested in an annuity plan. The 60 percent can be withdrawn in one single sum and is tax-free.

The annuity portion of the amount is taxed in the year of receipt.

Only 20% of the corpus can be taken out during a premature withdrawal, which is also taxable. The remaining 80% must be re-invested in the annuity plan. The amount received from the annuity plan is taxed both when it is withdrawn and when it is received.

For any and all types of expenditures, premature withdrawal is not permitted. Certain guidelines have been issued by the Pension Fund Regulatory and Development Authority of India (PFRDA). Only certain medical emergencies, children’s marriages, and a few others qualify you for a premature withdrawal.


The lock-in period for this pension fund arrangement is slightly longer. The lock-in period lasts until you reach the age of 60. The lock-in period is 15 years, which is longer than its rivals, such as the public provident fund (PPF).

Types of NPS Account

NPS accounts are divided into two categories.

Tier 1 Account: A tier 1 account is one that offers tax advantages. This is the account with the most retirement benefits. Sections 80CCD (1) and 80CCD (2) apply to this section (1B). This is the usual NPS account that we’ve discussed previously.

Tier 2 Account: A tier 2 account is similar to a voluntary savings account, with none of the restrictions that a tier 1 account has. Withdrawal restrictions and a yearly minimum investment are not present in this account. The catch is that you can only open a tier 2 account if you already have a tier 1.

As a result, the first account you open is a Tier 1 account. Only once you’ve opened a tier 1 account can you open a tier 2 account.

Read, also: Section 80E: All You Know To about it And Tax Exemptions