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.


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.


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)?

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

  1. Hiii i am 58 years old i want to invest in nps 80 ccd(1b) and i have also invested 150000 u/s 80c . So can i get that other 50k deduction if i invest 50000 in that section for first time in NPS

  2. Hello mr Amit,

    in the above one of the replies you have replied that

    “For equity mutual funds to qualify for long term the holding period should be more than 1 year”- Do we can withdraw the amount that we have invested after completion of one year (or) any specific maturity period is applicable such as 10 or 15 or 20 years that we need to opt for.

    Thank you.

    • For most equity funds there is no restriction on when you can withdraw. You can do it even on next day of investment. However its tax free only when redeemed after 1 year of investment.

  3. what is best is nps good for investment

  4. Brilliant Explanation !! Good one

  5. Divyang Mehta says:

    Hi amit
    Thank you very much to give the conclusive details about NPS.
    Hey, I just wanted to know that how you had calculated 5.59 lac tax at maturity in first example and 16.30 lacs tax on second example . in first Example you had calculated on total corpus (ie. 90.0 Lacs *20%=~18 lac *30.9% =5.59lac ) while in second example you had calculated on 54 lac *30.9% = 16 lac approx.
    So how slab wise calculation impacted on maturity ?
    Thank you !!!

  6. Hi Amit,

    Thanks a lot for eye opening regarding NPS, I was about to open NPS account and I wont do that for sure. looking at long term investment, that to with max tax wont be good option.

    I work in private sector age is 35 Years, My earnings fall in to 30%.In form-16 I am done with 80C, Home loan, PF. not sure where I can save my Tax any more. I would appreciate if any option you can suggest.

    I dont have any education loan, mediclaim is already done, I am not eligible for RG Equity Saving Scheme.

    Not sure if I have any option to save my tax, or just keep paying it at maximum.

    Regarding Long term MF investment, do we need to specify it is going to be long term and mention number of years while investing in MF? What is the minimum number of years i have invest to eligible for long term, just want to insure my long term captial gain from MF is tax free.

    I am already doing MF investment through SIP. investing perticuler amount to

  7. 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?

    Vishal Sharma

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