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

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

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

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)?

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

  1. kishor bidaliya says:

    sir my investment
    80c
    1-lic 50000,
    2-ppf 100000
    80ccd 1-nps my contribution 60000
    total 210000 = 150000
    80ccd2 govt.10% 60000= 60000
    total 210000

    so what about 80ccd1(b) 50000???????

  2. I am a government employee. I have invested Rs 1.5 lakh 80C. I also contribute around Rs 64,000 per year to National Pension System (NPS). The government, my employer, also contributes a matching amount. I want to know whether I can claim my 80 C investment of Rs 1.5 lakh under Section 80C and the additional Rs 50,000 under Section 80CCD(1) on my contribution to NPS?

  3. Is this Rs 50000 NPS saving option avaliable for govt employees who have joined before 1.1.2004?
    Will they get tax benefit if they open NPS tier one account and save Rs 50000 only.

    Kinldy calrify

    Thank you.

  4. I am TN Govt employee. I joined contributory pension scheme in TN Govt. Is it eligible for my contribution 10%(BP+DA )@ 80CCD(1B)?.CPS is equal to NPS?

  5. Hi Amit,
    I am 40 years and in 30% tax bracket. Whether investing 50K in NPS for tax benefit under 80CCD(1B) is advisable?

    • This is something only you can answer or you might want to consult investment advisers. I can just tell about the product, you need to decide if it fits your risk profile and overall investment goals!

      • Thanks for the reply. I was seeking your advise as an investment adviser. I was wondering with only 40% tax exemption on maturity (rest of the amount will again be in 30% tax bracket) whether NPS will be beneficial?
        Which equity mutual funds are good?

        • At maturity 40% amount has to compulsorily go to annuity purchase. Rest 60% can be withdrawn in lumpsum. Only 20% on NPS corpus is taxable at maturity. Also if you purchase annuity out of 60% corpus nothing is taxable at withdrawal. TO minimize tax you can also withdraw in installments. Know more – NPS – Maturity, Partial Withdrawal & Early Exit Rules

          Equity Funds are good not only due to their tax treatment but also they can generate higher returns in the long run!

  6. Hi Amit,
    Is section 80CCD(1B) applicable for the financial year 2016-17 ( AY 2017-18) & FY 2017-18 ( AY 2018-19) to get tax rebate in investing Rs. 50000.00 in NPS tier 1 A/C.?

  7. Sir,
    I want to avail tax benefit under 80cc d 1 b,
    Will i get tax benifit by investing 50 k in any endowment pension plan

  8. Hi Amit
    It would be nice if u can advice in current tax secenario. Also give a illustration where in I invest ₹50000in nps and the amount of tax saved on nps that is ₹15450 is invested in equity fund compared to only investing in equity fund. A penne saved is a penne earned. What will be the expected corpus my age is 35yrs
    Thanks

    • Any extra investment in Equity Fund for Long term would be GOOD for you. As the calculation is concerned the investment as of today remains Rs 50K an the maturity shown after tax. There is no instant redemption of Rs 15K when you invest in NPS ….

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