A lot people in India are looking for ways to save more tax while built a retirement fund. The National Pension System (NPS) is one such option.

Not only will it helps you to create a corpus for your old age but also offers you tax benefits under various sections of the Income Tax Act.

In this guide, we will focus on two important parts of NPS tax benefits for employees: 80CCD(1) and 80CCD(1B).
We will explain you what these sections are, how much you can claim, how they work together, and give examples so you can see exactly how it applies to you.

1. What is NPS?

The National Pension System (NPS) is a retirement savings plan run by the Government of India.
It is designed to help you save regularly during your working years and then use that money as a source of income after you retirement.

When you invest in NPS, it is managed by professional fund managers and is invested in a combination of equity (shares), government bonds and corporate debt.
You get to choose your preferred mix based on your risk comfort.

The main aim of NPS is simple:

• Help you create a pension fund for retirement.
• Give you tax benefits while you are working.

2. Understanding 80CCD(1) and 80CCD(1B)

These two sections appear in the Income Tax Act and are supposed to provide tax deductions on contributions that you make towards your NPS.

A. What is Section 80CCD(1)?

Section 80CCD(1) covers your own contribution to NPS.
If you are an employee, this means the part of your salary that you invest in NPS. If you are self-employed, it means the money you personally deposit into your NPS account.

The maximum you can claim under this section:

• Employees: Up to 10% of your salary (basic + dearness allowance).
• Self-employed: Up to 20% of your gross income.

However, there is an overall ceiling. The deduction under 80CCD(1) is part of the ₹1.5 lakh limit under Section 80C.
This means your NPS contribution plus other 80C investments (like PPF, ELSS, LIC premiums, etc.) together can only get you up to ₹1.5 lakh deduction.

Example:
Ravi’s annual basic salary is ₹6,00,000. He contributes ₹60,000 (10%) to NPS from his salary.
He can claim the full ₹60,000 under 80CCD(1).
But remember, this ₹60,000 will be counted in the total ₹1.5 lakh limit of 80C.

Read more about Section 80: Section 80C Explained: The Complete Guide to Tax-Saving Investments in India

B. What is Section 80CCD(1B)?

This is an extra benefit introduced by the government in Budget 2015 to encourage more people to invest in NPS.

Under Section 80CCD(1B), you can claim an additional ₹50,000 deduction for your NPS contribution.
This is over and above the ₹1.5 lakh limit of 80C.

This means if you invest more than your 80CCD(1) limit, you can put up to ₹50,000 more in NPS and claim extra tax savings.

Example:
Let’s say Ravi from the earlier example invests:

• ₹60,000 under 80CCD(1)
• ₹50,000 more in NPS voluntarily

He can now claim:

• ₹60,000 under 80CCD(1) (part of ₹1.5 lakh 80C limit)
• ₹50,000 under 80CCD(1B) (extra benefit)

Total NPS-related deduction = ₹1,10,000.
And his total tax savings could be even higher if he also invests in other 80C options.

3. How 80CCD(1) and 80CCD(1B) Work Together

You can think of it like this:

1. First, you get the basic deduction for your own contribution under 80CCD(1). This falls under the ₹1.5 lakh umbrella of 80C.
2. Then, you can invest an extra ₹50,000 in NPS and claim it separately under 80CCD(1B).

This combination can give you more than ₹1.5 lakh total deduction in a year just from NPS.

Quick Example Table:

4. Why This Matters for Employees

If you are a salaried person, NPS can be a great way to:

• Save more tax beyond 80C
• Build a retirement fund
• Enjoy professional management of your investments
• Benefit from market-linked returns over long term

For instance, people generally spend 80C limit on EPF, LIC or home loan principal. With NPS, they can increase that and enjoy additional ₹50,000 deduction.

5. Who Can Claim These Deductions?

• Any individual taxpayer, whether salaried or self-employed, can claim 80CCD(1) and 80CCD(1B).
• HUFs (Hindu Undivided Families) cannot claim these deductions.
• You must have an active NPS account to make the contributions.

6. How to Open and Contribute to NPS

Opening an NPS account is easy:

1. You can open it online through the eNPS portal or via banks, post offices, or financial intermediaries registered with PFRDA.
2. Choose your Point of Presence (POP) — this could be your bank or another service provider.
3. Fill the form, submit your KYC documents, and make your first contribution.

Once your account is open, you can contribute anytime during the year. You can also set up auto-debit from your salary if your employer offers it.

7. Tier I and Tier II Accounts

• Tier I account: The main retirement account. It has restrictions on withdrawals and is eligible for 80CCD deductions.
• Tier II account: A voluntary savings account with no tax benefits and flexible withdrawals.

For tax benefits, you must contribute to your Tier I account.

8. Lock-in and Withdrawal Rules

NPS is designed for retirement, so your money is locked in until you reach 60 years of age.
At retirement:

• You can withdraw up to 60% of the corpus as a lump sum (tax-free).
• The remaining 40% must be used to buy an annuity plan, which gives you a monthly pension (taxable as income).

Partial withdrawals are allowed in certain cases like higher education, marriage of children, purchase of house, or medical treatment.

9. Example Scenarios

Scenario 1:
Meera earns ₹8,00,000 basic salary per year. She contributes ₹80,000 to NPS through her employer.
She also contributes ₹50,000 more voluntarily.

Tax deduction:

• ₹80,000 under 80CCD(1) (part of 80C limit)
• ₹50,000 under 80CCD(1B)
  Total deduction from NPS = ₹1,30,000

Scenario 2:
Rohit earns ₹5,00,000 basic salary. He invests ₹50,000 in NPS and has no other 80C investments.

Tax deduction:

• ₹50,000 under 80CCD(1) (part of 80C limit)
• No extra under 80CCD(1B) because he did not invest beyond his 80CCD(1) amount.

10. Tips to Maximize NPS Tax Benefits

• Use your full 10% of salary limit under 80CCD(1) if possible.
• Add an extra ₹50,000 under 80CCD(1B) to save maximum tax.
• Combine with other 80C investments for complete ₹1.5 lakh coverage.
• Start early to benefit from compounding returns.
• Choose your investment mix in NPS based on your risk comfort.

11. Common Mistakes to Avoid

• Thinking 80CCD(1B) is part of 80C — it is extra.
• Forgetting to contribute to NPS before March 31 of the financial year.
• Not keeping contribution receipts or proof.
• Confusing employer’s contribution (80CCD(2)) with your own (80CCD(1) and 80CCD(1B)). Employer’s contribution has separate rules.

12. Final Thoughts

NPS is not just about saving tax — it is about securing your future.
By using Sections 80CCD(1) and 80CCD(1B), you can:

• Save more than ₹1.5 lakh in taxable income
• Build a retirement fund that grows over time
• Benefit from professional fund management

If you are an employee and want to make the most of your tax-saving options, NPS should be on your list.
It is a disciplined way to invest for your retirement while enjoying extra tax savings every year.

Need help calculating your savings? Try our NPS Tax Calculator! 😊