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 15,600 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.
Alternatively, Amit can pay tax on this Rs 50,000 and invest the remaining amount (i.e. 50,000 * (1-31.2%) = Rs 34,400) in Equity Mutual fund which gives return of 12% annually.
Also Read: NPS Tax Benefit u/s 80CCD(1), 80CCD(2) and 80CCD(1B)
Updated Comparison: After introduction of Long Term Capital Gains Tax on Equity Mutual Funds in Budget 2018
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 92.98 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 31.2% tax, which means you would be left with net amount of Rs 48.64 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, the long term capital gains in equity mutual fund is taxed at 10.4% (from FY 2018-19). At maturity you have Rs 93.39 Lakhs which after LTCG tax would be Rs 84.38 Lakhs.
If you see the taxation of both NPS and Mutual Funds have changed in last 2 years. So a long term decision (30 years in this case) cannot be made just based on present tax rules.
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.
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 while Budget 2018 introduced Long term capital gains on equity mutual funds. You get instant tax saving if you choose NPS. You may look to invest in NPS but keep the following in mind:
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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.?
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"
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.
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?
Yes you can make contribution of Rs 50K in NPS Tier 1 to take tax exemption u/s 80CCD(1B)
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.
WHETHER THE LIMIT OF 50000 INCLUDES BOTH EMPLOYER AND EMPLOYEE CONTRIBUTION
It only includes employee own contribution.
Hi Sir,
Any good Equity Mutual Fund in which amount can be invested in FY 2016 - 17.
You might want to look at the Mint50 List of mutual funds and choose what suits you.
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.
Yes you'll get tax exemption of Rs 2 lakhs - 50K for NPS u/s 80CCD(1B) and Rs 1.5 lakh u/s 80C
Sir I am state Govt. Employee and followings are the my pay particulars
Please tell me how much tax should i pay and How can i show NPS amount in 80ccd (1b)
Gross Income - 734182
HRA Exemption- 30913
PT Expetion - 2400
Gross Income 700869
Savings
KGID - 36000
EGIS- 02160
LIC - 50076
SSY - 24000
NPS - 98712 ( Employee Contribution Only)
Medical Insurance - 8141
Donation - 3000 ( only 50% exemption as per Donation Receipt)
as per our calculation
Gross - Saving (KGID+GIS+LIC+SSY+NPS) - on and above 1.5/2 lakh (Medical Insurance & Donation)
700869 - 210948 ( 2 lakh)-8141+1500
Taxable Income 491228-250000 ( less than 5 lakh ) 241228 Actual Taxable Income
10% of 241228 = 24123
Less Rebate 24123-2000 = 22123
3 % Education Cess = 00664
Total Tax Payble = 22787
please clarify weather the calculation are done correct or not.
Yes your calculation is correct. You can also verify the same using Income tax calculator for FY 2015-16.
sir i am a govt employee my saving u/s 80c is 75000 and my NPS contribution is 111700 how should i show my saving using section 80ccd (IB).
You can show Rs 50K of NPS investment u/s 80CCD(1B) and rest u/s 80C
Sir,
I have invested 1,30,000/- in PPF and 55,000/- in NPS. How to show the breakup?
Rs 50,000 NPS u/s 80CCD(1B) and Rs 5,000 NPS and Rs 1,30,000 in PPF u/s 80C.
sir,
HERE DETAILS AS BELOW SHOWS MY SAVING FOR YOUR REFERENCE...
1. KGID---- 48000
2. NPS---- 59776
3.GIS---- 2160
4. LIC---- 42527
5. SUKANAYA SAMRDHI YOJANA ----41000
TOTAL SAVING=193663
Question is Total NPS amount is 59979 in which can i claim 50000 under 80ccd1b and remaining amount 9776 in 80c
PLS CLARIFY
Yes you are right about NPS