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)?

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

  1. Sandeep kumar says:

    Ye 80ccd1(b) kya h

  2. Anjan Sharma says:

    Amit, please clarify one thing here. 40% of corpus must be invested in annuity which is tax free. Furthermore 40% of the corpus is tax free. Does this mean effectively only 20% of the corpus is taxable if 60% is withdrawn?

    If yes, then effectively your calculation for the example above (Option 1) changes to Rs. 5.591046 tax payable on maturity. This too can be significantly minimized if one does not need all the money in one go and can afford to do a phased withdrawal till the age of 70.

    Regarding Option 2, you failed to take into account one crucial point, the extra tax outgo caused by not investing in NPS i.e. 30.9% of 50k = 15450/year. Over 30 years, that’s an outgo of 4,63,500.

    5.59 lacs vs 4.63 lacs – Yes, option 2 still wins but the margin is ever so narrow now that most people can safely choose to go either way. And let’s not forget that the government has it’s eyes on LTCG.

    • Budget 2016 has made NPS more tax efficient. The calculation is pre Budget 2016 and would change with the new tax laws.

      In option 2 the invested amount is Rs 35K which is after paying tax of 15K on 50K for not investing in NPS. So the calculation does not change from that perspective. Also annuity is poor yielding and taxable investment!

      The above calculation is true mathematically. But the question is would a person invest in Equity mutual fund if he does not invest in NPS – as saving tax plays a big incentive and makes one disciplined. My guess is for most people might skip NPS and keep money in savings account or fixed deposit or just blow it – in which case NPS would be better option.

  3. Can I invest only in 80CCD (1B) without investing in NPS for 1,50,000/- in the first place? Say I invest in PPF, LIC, ELSS for Rs 1,50,000/- and can I invest only for 80CCD(2)?
    What will be tax treatment at the withdrawal as per the latest budget in this case?

    • You can invest 50K in NPS to get tax benefit u/s 80CCD(1B). You cannot get tax benefit u/s 80CCD(2) as it’s only valid for employer contribution. Budget 2016 has proposed tax on 60% of the NPS corpus at maturity. So 60% of NPS maturity amount would be added to your income for that year and taxed at marginal tax rate applicable to you.

  4. if i invest 50k this year, i will save tax of 10k. this is not accounted, lol

  5. Can we opt 100% equity and 0% debt in NPS? If yes, why didn’t you compare using this option?

  6. Sir I am a govt employ my gross income is Rs 542544 and 10% contribution Rs 51532. And my insurance policy is Rs 1.52 lakh canl l get tax rebate Rs 2 lakh ?

  7. Sir I want to know What is 80CCD(1B)

  8. Pratham kumar says:

    Sir I am a govt employ and my gross income is rs 542544, my lic investment is rs 150000 and NPS contribution 51526 and govt contribution is same I want to know will l get how much tax rebate

    • You would get tax rebate of 1.5 lakh u/s 80C and Rs 50K u/s 80CCD(1B) for investment in NPS. Also the employer contribution in NPS is tax exempted.

  9. I am a central government employee working under Ministry of Agriculture. One of my officer is GPF (General Provident Fund) A/c holder and he want to avail the additional tax benefit under NPS u/s 80CCD(1B). Please clarify that, whether all the employees can avail this tax benefit who have joined the service before 01-01-2004 or only NPS employees can avail who joined after 01-01-2004.

    • NPS tax deduction u/s 80CCD(1B) is available for everyone irrespective of he is government employee or not. So yes your officer can avail this benefit. Also opening NPS account takes 2-3 weeks so if you are looking to invest in the same, deposit your application form at the earliest.

  10. So according to you, instead of investing in PPF & NSC, invest rather in Equity Mutual Fund . Am i right?

    • Equity Mutual funds generally give higher returns in the long run and the best part is this is tax free. PPF is good as it’s the best debt investment option as it has no risk and also the returns are tax free. NSC to me does not make sense. You can read more about 80C investment options and my take on each of them.

  11. A govt employee invested nearly1.3 lakhs in NPS account this year.Equal amount is contributed by the employer. Thus the total amount is 2.6 lakhs is invested in NPS.this year….. My doubts are
    1.Should I invest more to get the tax benefit through 80 ccd[1b].and If so,need details
    2.What will be the total tax benefit through the present investment.?

    • You need not invest additional amount in NPS, you can claim tax benefit up to 50,000 from your contribution as employee u/s 80CCD(1B). You can read about the tax benefit of NPS for more clarity.

    • Please confirm 80ccd 1b. My salary is 7lack and nps contribution is 10% of it i.e. 70000. Same amount is credited by the state govt. My saving in ppf is 140000. Now how do i have to break up these savings in different sections? I have heard that 80CCD1b is applicable only for nps contribution grater than 10% of salary. Help plz.

      • You would get 50K benefit u/s 80CCD(1B) for your contribution to NPS, rest 20K in NPS and 1.4L in PPF would give you tax dedcution of 1.5L u/s 80C. Sorry I am not aware of any such rule about “80CCD(1b) benefit applicable only for nps contribution grater than 10% of salary”

  12. Sandeep Srivastava says:

    Dear Sir,
    I am a private sector employee and had opened a corporate NPS account and Rs 50000/- has been deducted from from my basic salary by my employer and contributed to that account. In my form 16 that amount will not be added to my salary component. Now my question is that can I make further contribution of Rs. 50000/- to that Tier 1 account for claiming Tax Benefit of Rs 50000/- u/s 80CCD(1B) or not?

  13. Sir I am govt employe. I save 1.5 lack in ppf and my deducter cut 10% in nps 41845 and same deposit by employers in my nps account now I want to know I which 41845 save my tax or gross salary is 487172.

    • You would get tax exemption of Rs 1.5 lakh for investment in PPF u/s 80C and Rs 41,845 for investment in NPS u/s 80CCD(1B). So total tax exemption is Rs 1,91,485.

  14. WHETHER THE LIMIT OF 50000 INCLUDES BOTH EMPLOYER AND EMPLOYEE CONTRIBUTION

  15. Nilesh Jain says:

    Hi Sir,

    Any good Equity Mutual Fund in which amount can be invested in FY 2016 – 17.

  16. Sir, I am a state govt. employees. I have invested Lic, Reliance Tax saver etc. Rs. 150000.00 and in NPS Rs. 54000.00 Sir, am I able to avail to get Rs. 200000/- deduction.

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