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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Sir I am a state govt employ and I have already contributed in NPS of amount Rs 65756 under 80C every month in financial year 2015-2016 . I need tax exemption under 80CCd 1b of Rs 50000. So again I Have invest...or not required.
You can take tax advantage on already invested amount in NPS u/s 80CCD(1B). So no need on any fresh investment
Sir
I am Govt employee under GPF scheme, having no NPS account. am I eligible for deduction u/s 80CCD(2) in addition to the Sec 80C.
If yes what type of NPS account will open and where
Yes you are eligible to open NPS account and invest in Tier 1 account. You would get maximum tax deduction up to Rs 50,000 u/s 80CCD(1B). You can get more details about opening new NPS account in my earlier post.
Investment u/s 80CCD(1B) is also coming Rs 150000.00 under section 80(C0
Investment of Rs 50K in NPS is exempted u/s 80CCD(1B) and it is in addition to the Sec 80C
Dear Amit, Please clarify the below query:
NPS - Employee Contribution 75000/- u/s 80CCD(1)
NPS - Employer contribution 75000/- u/s 80CCD(2)
PPF - 75000/- u/s 80C
1) Maximum deduction that a govt employee can get in the above case. Both contribution 80CCD(1) & 80CCD(2) are 10% of salary (i.e. 10% of Basic & DA)
2) Can employee invest in PPF to claim further deduction. if yes, then how much.
3) for calculating the Maximum limit of 2 lacs 80CCD(2) is consider or not.
Here are your answers:
1/2 - You should claim Rs 50,000 invested in NPS as tax exemption u/s 80CCD(1B). Rest of Rs 25,000 would be exempted u/s 80CCD(1) which along with 80C has maximum cap of Rs 1.5 lakhs. You have already invested Rs 75,000 in PPF. You can do additional Rs 50,000 investment in any instrument of your choice exempted u/s 80C.
3 - The maximum limit of NPS does not consider 80CCD(2) exemption.
Sir, I am a serving Govt employee employed prior to 1.1.2004. Please clarify, whether I am eligible for contribution of Rs. 50,000/- towards Tire-1 (NPS) and getting rebate of over all deposits of Rs. 2 lac under 80 c
Yes you can contribute additional 50K in NPS to get tax benefit u/s 80CCD(1B).
I am a central govt. employee and invested nearly 1.3 lakhs in NPS account. .Equal share will be there as emplooyees contribution. What can be my income benefit? should I invest again to get tax benefi in NPS 80 CCD[1B]
No you can count your contribution in NPS u/s 80CCD(1B) and invest in other avenues to save tax u/s 80C - if there is still shortfall.
sir i m govt employee, with gross income of about 6.25 lakhs , nps own contribution of about 55000 and nps employer's contribution of about 55000. am i eligible for extra 50000 tax benefit(under section 80ccd(1b)) above 1.5 lakh tax deduction limit
Yes if you want you can invest additional 50,000 in NPS Tier 1 to get tax benefit u/s 80CCD(1B)
sir if a govt. employee is having annual gross income of about 6.25 lakhs. is he eligible for deduction under section 80ccd(1B)
Yes there is no criteria of income for investment in NPS for getting tax benefit u/s 80CCD(1B)
Sir
Actually i have gone through the G connect site and have uploaded the details as share with you.
The Tax calculator has given the Only benefit of PPF under 80 C. The Employee contribution has not been allowed as 80 CCD (1B).
So kindly get confirmed sir, whether the Contribution for NPS deducted from Salary is eligible for 80 CCD (1B) as additional Tax Benefit or new investment is to made
I too have come across confusion if NPS tax advantage u/s 80CCD(1B) can be from employee contribution or it is to be necessarily contributed separately. But most publications and experts are of the view that even employee contribution in NPS qualifies for tax deduction u/s 80CCD(1B).
The problem is there are lot of areas where income tax rules are ambiguous and experts have different view. Unfortunately we have to wait for clarification from the tax department, if it comes ever!
Dear Sir, if I am a small salary earning employee and I have already invested in NPS up to 10% of salary. Now I want to invest additional 50,000/- Is this additionally allowed ? apart from 10% of salary ? Regards SSRao
Yes there is no limit on how much you can invest in NPS. However the tax exemption is limited to Rs 2 lakhs (own contribution) for investment in NPS Tier 1.