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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View Comments
Dear Sir,
I am 55 years old PSU employee and in the tax bracket of 30%. I want to invest 50,000/- ( FY 2015-16) in the following manner:
Tier-I: 6000/- & Tier-II: 44000/ - (Total=50000)
Now I would like to know whether I can do that and will I get tax benefit of 15450/- (50000*30.9%).
In the above scenario what type of result will I get in Tier-II investment i.e. on 44000/- p.a. after completion of 60 yrs. Whether investment in the Tier-II scheme is withdrawable after 60 years and will that be taxable. Please explain more about Tier-II investment.
Thanks and regards
Nayen Kumar
NPS Tax benefit is available only for Tier-1 account. So no point of investing in NPS Tier - II for tax benefit. The returns of both Tiers would be similar as the asset allocation is same for both. The only difference if Tier 2 you can withdraw anytime while in Tier 1 you can withdraw only after you turn 60.
I want to point out a slight flaw in the return calculation of NPS. You can't just average the return of Equity and Debt components as 10%. Each year the corpus of Equity component of NPS grows at higher rate compared to Dept. Therefore you need to calculate them separately. Equity component of NPS grows to Rs 67,57,315 at 12% return on Rs 25,000 annual contribution. Debt component of NPS grows to Rs 30,58,647 at 8% return on Rs 25,000 annual contribution. Total of these would be Rs 98,15,962 which is almost 8 lakhs higher than your calculation. However, if we consider the tax on withdrawal, Option 2 will still be better.
my wife is state government employee in rajasthan education department. I want to know that she is eligible for additional tax benefit on additional NPS of Rs.50000 or not? She has taken employee contribution deduction u/s 80CCD(1) in limit of Rs.150000 & employer contribution deduction u/s 80CCD(2). She want to invest additional Rs.50000 in NPS to avail additional tax benefit of Rs.5000. Kindly suggest it is advisable or not? - See more at: http://taxguru.in/income-tax/sec-80ccd-additional-deduction-
Yes she is eligible for taking tax benefit u/s 80CCD(1B). It's advisable to take advantage of already contributed NPS under Sec 80CCD(1B) and do additional investment in ELSS/PPF for section 80C.
National Pension Scheme under section 80 ccd(1B), I want to deposit nps tax deduction and how can do this processes, please explain it. Whether this scheme process in nationalized banks or postal officer, pls. clarify.
Thanking you.
There are several Point of Service locations including banks like HDFC Bank, ICICI Banks, etc where you can open your NPS. Read - How to Open NPS Account? for more details.
I am in a govt.job, my employer deducts 36000 p.a total from salary as employee's contribution (NPS) on which I get tax benefit under 80 ccd(1) and also deposits 36000 p.a. under NPS as employer's contribution on which I get tax benefit under 80 ccd(2)
I have deposited 1,50,000 in PPF on which I get tax contribution under section 80 c
Now what I want to ask is, I have exhausted my limit under section 80c by investing in PPF, to get extra deduction of 50,000 under section 80 ccd(1b) can I use my employee contribution 36000 which is deducted from my salary [ 80 ccd(1) ], means can I use that 36000 not under 80c and can I use it under 80 ccd(1b) ?? :D :D
Yes you can use your part of NPS contribution to claim tax benefit u/s 80CCD(1B) and invest additional Rs 1.5 Lakh in PPF to take benefit u/s 80C.
This artical realy a good comparison
I was also confusing between these two
but now clear
my govt organization deducts Rs. 45,000 p.a as NPS employee contribution under 80ccd(1) from my salary
i have saved tax by contributing Rs. 1,50,000 to PPF
can i show that rs. 45000 p.a under 80ccd(1b) column or I need to contribute extra Rs. 50000 for it
Pls tell?
I HAVE JUST OPENED NEW nps ACCOUNT IN ALL CITIZEN MODEL AND I HAVE INVESTED IN TEAR2 ACCOUNT RS 50000, SHOULD I GET TAX BENEFIT U/S 80 CCD 1B OR I HAVE TO INVEST IN TEAR1 ACCOUNT ONLY ??????
The tax benefit is only for investment in NPS Tier -1 account. So invest accordingly.
Hi Amit, the article is indeed very good, yet NPS is offering a big security too by investing in debt, in case equity market fluctuates too much and gets slow down for years which we saw in past too.
The comparison is with Equity Mutual Fund. But if you compare it with Fixed Deposits or bonds then NPS might turn out to be better option for Retirement planning.
If someone has already taken the policy for pension scheme through LIC is also eligible for this deduction under this section
No Only NPS is eligible for Sec 80CCD(1B)