Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

Invest in NPS to Save Tax

Invest in NPS to Save Tax

Budget 2015 had introduced a new section 80CCD (1B) which gives deduction up to Rs 50,000 for investment in NPS (National Pension Scheme) Tier 1 account This new deduction can help you save tax up to Rs 15,450 in case you are in the 30% tax slab.

The question is should you take advantage of this new tax deduction and invest in NPS?

NPS has not taken off as expected and finance minister by giving this additional tax saving option is trying to give it a push. We all know how many people invest blindly in poor schemes just to save tax. This post is to analyze if it makes sense for us to invest in NPS to save additional tax.

Assumptions:

For our calculation we assume that Amit is 30 year old and would retire at the age of 60. So he would make investment for 30 years.

  • NPS Investment Option: Most Aggressive i.e. 50% investment in equity and 50% investment in debt
  • Amount Invested Annually: Rs 50,000
  • Return on Equity: 12%
  • Return on Debt: 8%
  • Tax Bracket: 30.9%
  • Also the tax bracket remains 30.9% at the time of withdrawal at the age of 60.

Alternatively, Amit can pay tax on this Rs 50,000 and invest the remaining amount (i.e. 50,000 * (1-30.9%) = Rs 34,550) in Equity Mutual fund which gives return of 12% annually.

Also Read: 6 Changes in NPS Rules in 2016 & How it Impacts You?

Updated Comparison: After changes in Tax laws for NPS

Should you Invest in NPS to Save Tax u/s 80CCD (1B) - Revised Calculation

Should you Invest in NPS to Save Tax u/s 80CCD (1B) – Revised Calculation

As can be seen in the calculation above, the final amount generated by NPS is 90.47 Lakhs while in case of equity mutual fund its 93.38 Lakhs.

Additionally, in case of NPS you can withdraw maximum of 60% of the total maturity amount which is 54.28 Lakhs. 20% of NPS corpus would be further subjected to 30.9% tax, which means you would be left with net amount of Rs 48.69 lakhs after tax. Rest Rs 36.19 lakhs should be used to purchase annuity.

The proceeds received from this annuity is again considered income and taxed according to marginal tax rate. Also annuities in India have not evolved and the return from varies in the range of 6% – 7%. This makes it a sub optimal investment choice.

In case of investment in equity mutual fund, entire long term capital gains are tax free. So you have Rs 93.39 Lakhs at maturity.

Significant points:

  1. For people in lower tax brackets, investing in Equity Mutual Fund becomes much better option as compared to NPS. This is because the tax outgo is lesser and hence more money is invested in MF.
  2. As the duration of investment goes up the mutual fund option becomes even better due to compounding at higher return rates.
  3. You might be in lower tax brackets at the time of investment; but might fall in highest tax bracket while withdrawing NPS as it would be accumulated over a long period of 25 to 40 years.
  4. With the new rules you can split your withdrawal till the age of 70 – lessening you tax outgo.
  5. You need not purchase annuity if the NPS maturity corpus is less than Rs 2 Lakhs.

Should People nearing Retirement Invest in NPS?

I often get queries by people near retirement that if they can and should open NPS account to get tax benefit u/s 80CCD(1B). Below is my take and you can take your decision accordingly.

  • Anyone who is below 60 years of age can open NPS account – so technically you can open your NPS account.
  • Assuming you are 57 years or more and the tax exemption stays for next few years. You can invest 50,000 every year for 3 years. With 10% annual returns your NPS maturity amount would be less than Rs 2 lakhs.
  • As per rules, you need not purchase annuity if the maturity amount is less than Rs 2 lakhs. So after retirement you can withdraw the amount without much tax burden.
  • You can also time the withdrawal to a year (but before reaching 70 yeas of age) when the tax liability is lower or split the withdrawal in 10 installments.

Also Read: NPS – Maturity, Partial Withdrawal & Early Exit Rules

Even for lower age people you can start investing Rs 50K for tax saving until its provided for and keep account active by contributing minimum of Rs 1,000 per year.

Conclusion:

Budget 2016 had brought down the tax liability on NPS maturity to acceptable level. You get instant tax saving if you choose NPS. You may look to invest in NPS but keep the following in mind:

  1. The NPS tax benefit may be done away in future but you are ready to continue the same with minimum annual investment
  2. Tax on investments keep on changing and equity mutual funds may be taxable in future
  3. Equity Mutual Funds would still outperform NPS in most cases
  4. NPS would outperform if compared to fixed deposits (in most scenarios)

Below is the comparison when NPS lumpsum withdrawal was fully taxable (before Budget 2016):

Should you Invest in NPS to Save Tax u/s 80CCD (1B)?

Should you Invest in NPS to Save Tax u/s 80CCD (1B)?

332 thoughts on “Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

  1. Vishal Sharma says:

    Hello Mr. Amit,
    Have we missed here the yearly Tax save amount of Rs. 15450 which we can invest every year for 30years. And at a low risk we get a return of 10% annually. So investing for 30yr Rs 15450 [email protected]% we get Rs. 27,95,573.
    So NSP seems to be better in any case.

    What’s your view?

    Regards,
    Vishal Sharma

  2. Ravichandran L says:

    Dear Mr. Amit, I am a professional trainer (Freelancer) since Jan’2017. I have already opened the NPS account in March’2017. I am given to understand that I can invest 20% of my Gross income in NPS (I am not sure about the applicable section for this exemption) and I suppose this was 10% for the previous FY 2016-17. Additionally I can invest 50,000 under section 80CCC(1B). Can you confirm / guide me on this and confirm which section would apply for the 20%.

    • The increased limit of NPS to 20% for self-employed is u/s 80CCD(1) which forms part of 80C deduction. So combining both 80C & 80CCD(1) you can save maximum 1.5 lakhs.

      However you can save up to Rs 50,000 for investment in NPS u/s 80CCD(1B).

  3. Ajay Samadhiya says:

    please suggest which mutual fund is having maximum return if I want invest 2000 per month.

  4. vimal singh says:

    hi i am still confuse abt sec 80ccd(1B) …i am government servant and only having contribution in Tier-I acct but while filing returns dont get any clue which amt i have to enter in 80CCD(1B)..

    plse address my this query.
    thanking you in anticipation

    • You can split your NPS contribution u/s 80CCD(1) & 80CCD(1B). 80CCD(1B) can have max of Rs 50,000 rest would go in 80CCD(1).

  5. Can I get Tax benefit for my contribution towards Atal Pension Yogana? If yes, is it equivalent to NPS Tier 1 benefit?

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