Categories: BudgetBudget 2015Budget 2018Investment PlanRetirement planningTax SavingTaxes

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

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.

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: 31.2% (surcharge revised in Budget 2018)
Also the tax bracket remains 31.2% 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 * (1-31.2%) = 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

Should you Invest in NPS to Save Tax u/s 80CCD (1B) – Revised Calculation after 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.

Download: Free ebook for Income Tax Planning for FY 2018-19

Significant points:

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.
As the duration of investment goes up the mutual fund option becomes even better due to compounding at higher return rates.
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.
With the new rules you can split your withdrawal till the age of 70 – lessening you tax outgo.
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 65 years of age can open NPS account – so technically you can open your NPS account.
Assuming you are 62 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 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:

The NPS tax benefit may be done away in future but you are ready to continue the same with minimum annual investment
Tax on investments keep on changing and tax on both mutual funds & NPS can change in future
Equity Mutual Funds would outperform NPS in most cases
NPS would outperform if compared to fixed deposits (in most scenarios)

Amit

Hi Readers! I am Amit, the mind behind Apnaplan.com I am MBA from NITIE, Mumbai and BIT from Delhi University. This blog is my online diary where I write about my tryst with my investment decisions. In the 400+ posts on this blog you will find articles on Personal Financial Planning, Investments, Retirement Planning, Insurance, Loans, Fixed Deposits, Provident Funds, Stock Markets, Gold, Silver, Real Estate Investment, Credit Cards, Credit Score, Taxation, Inheritance Planning and Reviews on various Financial Products.

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View Comments

shiva says:

February 7, 2016 at 10:49 am

Sir,
Ihave invested Rs. 1,50,000/- in the PPF. My contribution in NPS 10% is Rs.60,000/-.Can I claim deduction of Rs.50,000/- from this amount of Rs.60,000/-, u/s 80 ccd(1b)?. Please reply soon………. Thanks
- Amit says:
  
  February 8, 2016 at 2:17 pm
  
  Yes you can
Naresh Bhanwala says:

February 6, 2016 at 6:07 pm

I M government employee & my nps deduction rs 49648 can I avail tax benefit for this amount under sec 80ccd1b over rs 150000
- Amit says:
  
  February 8, 2016 at 2:20 pm
  
  Yes you can get tax benefit u/s 80CCD(1B)
Amit Kumar says:

February 2, 2016 at 4:13 pm

my investment in lic pli is 150000 deduction of nps 10% of basic is 42350 extra can i take benifit of saving 192350 define please
- Amit says:
  
  February 2, 2016 at 4:55 pm
  
  Yes you can take advantage of both your LIC policy and NPS deduction. Only consider your part and not the employers contribution for NPS.
Milind says:

January 31, 2016 at 6:01 pm

Hi, Tanks for the explanation.

Two queries:
# With only 6yrs to retirement, will your advice remain same?
# There is an option to withdraw 60% amount in staggered manner over few years after retirement; the amount withdrawn can be kept below taxable limit. As such, one does not need the complete amount immediately after retirement. And with NPS a/c opned as recent as 2014, the corpus will not be very high.

Kindly revert.

Thanks.
Milind
- Amit says:
  
  February 1, 2016 at 2:58 pm
  
  My advise is only mathematical :). The question is what would you do with Rs 50K if you do not invest in NPS? In case you would invest in equity mutual fund, that might offer better returns. In case you would invest in FD, then NPS might be better bet.
  
  Assuming you invest 50K every year for 6 years for tax saving and get 10% returns, the NPS maturity amount would be around 4 Lakhs. You would be able to withdraw around 2.4 lakhs as lumpsum and have to purchase annuity for Rs 1.6 Lakhs. This annuity might pay you around Rs 1,000 monthly.
  - Milind says:
    
    February 2, 2016 at 11:16 am
    
    Thanks.
    Can you comment on 2nd point? Is 'staggered withdrawal of 60% amount for tax planning' a technically correct possibility? (I also have an amount going into NPS under 80CCD(1)).
    Regards.
    - Amit says:
      
      February 2, 2016 at 1:06 pm
      
      Yes you can Withdraw the lumpsum amount at NPS maturity in 10 annual installments till the age of 70 years.
P K Das says:

January 30, 2016 at 4:25 pm

Mr. Amit,
I am under 30% tax slab and now 51 years old. Retirement age is 60. Should we go for investing 50K in 80CCD(1B) to get exta tax benifit or we should invest in MF
- Amit says:
  
  January 31, 2016 at 10:19 am
  
  As per my calculation investing in Mutual fund seems better. Rest it's personal decision :)
Sukhvinder says:

January 29, 2016 at 12:55 pm

My investments are ₹100000 in ppf, 50000 in sukanya smridhi and 28000 in LIC. I also invest 10000 in NPS tier1 and its statement showing investment in 80cce. How I will get benefit of 80ccd 1b. Please clear.
- Amit says:
  
  January 29, 2016 at 1:08 pm
  
  The choice of which section to take advantage for NPS lies with you (80CCE or 80CCD(1B)). So do not worry about the statement as the system might not be updated!
Tejveer says:

January 28, 2016 at 10:00 am

Dear Amit Ji .
Thanks for the valuable suggestions.

Pls. clarrify :

My annual contribution towards NPS Tier -1 is (say) 72000/-
My other investments (say ) 78000/-

If i want to save tax further , i plan to invest further in NPS-80CCD(1B).
1). What is the procedure for that investment?
2). if i invest 20000 in NPS , that will be included in 72000+20000.
or i have to declare that this contribution is towards 80CCD(1B)?

Thanks
- Amit says:
  
  January 28, 2016 at 11:22 am
  
  The choice of which section tax payer wants to show his investment in NPS (Tier 1) for income tax exemption is his call. So you can choose weather to claim tax exemption u/s 80C or 80CCD(1B) for NPS. Ideally you should first claim tax benefit u/s 80CCD(1B) for 50K investment in NPS. Whatever is left goes to 80C.
  
  So in your situation you should claim 50 out of 72K NPS investment u/s 80CCD(1B) and 22K u/s 80C. The rest (150K-22K) 128K investment u/s 80C can be made as per choice in PPF, ELSS or NPS - whatever you choose.
- Rajan Srivastave says:
  
  January 28, 2016 at 10:02 am
  
  Sir,
  
  My query is also the same..
Pawan kumar says:

January 28, 2016 at 6:05 am

Amit ji kya nps t1 ke under govt contribution of 10% gross salary mein include hogi
- Amit says:
  
  January 28, 2016 at 8:48 am
  
  Only employee contribution is considered for tax benefit. so govt contribution in NPS would not be taken in consideration for tax exemption.
Shyam mohan jaiswal says:

January 27, 2016 at 9:49 pm

Dear Amit
Thanks for ur valuable information.i m govt employ and my compulsory contribution towards nps tier 1 account is more than 50000. Whether i can invest 1.5 lakh in other instruments to avail benefit of 80c or it is necessary to invest additional 50000 in nps to get benefit of 80ccd (1b).
- Amit says:
  
  January 28, 2016 at 1:13 am
  
  You can invest the way you want. You can claim 80CCD(1B) exemption against the compulsory contribution towards NPS. In case it's more than 50K, you can also take exemption u/s 80C. For remaining part you can invest according to your will for total exemption of Rs 1.5 Lakh u/s 80C.
Suchi says:

January 27, 2016 at 12:35 pm

Hello Amit,
Well explained and very good information. I was going to invest in this scheme. But after going through your post, will deliberate more over it. Also as the calculations and explanations shown by you, I am almost sure not to invest in this scheme and rather make additional investment of Rs. 50000 in mutual funds.
- Amit says:
  
  January 27, 2016 at 1:00 pm
  
  Thanks for your appreciation :) and glad to know it helped you in your investment decision.