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

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• Nice article and quite helpful for people to decide.

  • Thanks

• The treatment of NPS contribution towards Income Tax purpose does not seems to be correctly reflected by the author and the views given are suspect.

  Under Section 80CCD (1) the statutory 10% of Emoluments (Basic + Dearness Allowance) contribution to NPS-Tier-1 Account amounting upto Rs.1,50,000 is counted towards Section 80C which can be deducted from Taxable Income. Additionally up to Rs.50,000 can be deducted from taxable income provided it is invested in NPS-Tier-2 Account. Thus, to claim additional Rs.50,000 deduction one need to invest in NPS-Tier-2 Account. For example, if one make say all Rs.2,00,000 contribution in NPS-Tier-1, the entitled deduction is only Rs.1,50,000. The same can be confirmed by using the Tax Calculator given on the website of Income Tax Department.

  For more details please read http://www.pfrda.org.in/MyAuth/Admin/showimg.cshtml?ID=671

  Hope the author can through more light on it.

  • But sir you may go through again the addtional tax benefit of amont 50000 is only on tier I and not in tirr tier II. It is mentioned that all tax benefit are on tier tier one only. Tier II is just like a mutual fund. No benefit in this

  • My understanding was wrong. In fact, in NPS Tier-1 account, contribution upto Rs.50,000 over and above the statutory 10% of emoluments (Basic + DA) is eligible for deduction under Section 80CCD(1B) from the taxable income.

    • There is some confusion among tax experts about the same and no clarification has been offered by income tax department. If you want to play safe you might want to deposit Rs 50K additional to claim sec 80CCD(1B) benefit.

      • Yes, Amitji that appears the correct position. Thanks.

  • Additional up to Rs.50,000 can be deducted from taxable income using NPS-Tier-2 Account under Section 80CCD(1B).

    • In effect, contribution to the NPS-Tier-1 Account can not be counted towards deduction under Section 80CCD(1B).

• Hi Sir,
  I have a question here, I have taken a house loan during 2013 (it was second hand home, but possession dint happened due to different reasons). Since all this 3 years i was claiming HRA exemption n. This year i have taken possession and planning to claim for Interest paid and Principal paid. Will this create a problem, since date of possession and date of loan sanctioned in 2 different years. Do i need to submit any other document ?

  • There is no problem in claiming interest/principal paid on home loan. In most construction linked plans the date of loan sanction and possession is different. The problem arises only if the difference is more than 3 financial years. In that case the interest exemption is limited to Rs 30,000 only for self occupied homes. This time frame has been increased to 5 years from FY 2016-17.

• Thanks for the wonderful article and the debate with Anup. This helped me to clear my doubts on investment in NPS. I have one additional question relating to the exemption of actual house rent paid from income tax. I have no component of HRA in my account. I pay about 10000/- per month as house rent. Is there a way I can claim for income tax expemption on it or part there of. Please let me know.

  • In case, you do not receive HRA as a salary component, you can still claim house rent deduction u/s 80GG. But uou cannot claim this deduction if you or your spouse or your children own any home in India or abroad.

    The House Rent deduction is lower of the 3 numbers:

    Rs. 5,000 per month
    25% of annual income
    (Rent Paid - 10% of Annual Income)

    • Thanks for the response. I have three more questions.
      1. Is this deduction is above the basic savings exemption of 1.5 lakhs or included in that?
      2. My employer deducts a sum of 1800 per month and it is shown as "employee provident fund". Can it be shown as employer's contribution to provident fund?
      3. Professional tax of 200 per month is being deducted by my employer. Is it exempted fully for income tax?

      • Here are responses:
        1. Sec 80GG is not included in Sec 80C exemption.
        2. Your contribution to EPF is eligible for tax deduction u/s 80C
        3. Professional tax is exempted from income tax

• Well, this article is one sided if not misleading. Let me put some benefits of NPS below:

  1. It is more secure: its like a balance fund. There are higher changes that you may lose your money in Equity MF than NPS. Ideally calculation should be done considering the investment in Balance Fund. So both NPS and MF with 10% return

  2. MFs are very very costly! MFs charge around 2000 RS per 1 Lakh RS / per year! so the actual amount invested in MFs over a period of time is much lower than MFs!

  3. Annuity investment is not taxable, the return on Annuity is. This is same as MF returns. Will you put the MF returns bank to MF for saving the tax at the age of 60? probably not! So you will put in some safe avenue FD or Post Office etc. Well the return on that is also taxable.

  Only advantage of MFs over NPS is liquidity and yes it indeed is a big one. But if you can live with that sure put your money in NPS.

  • @Arup thanks for reading and sharing your feedback.

    Any calculation/prediction is based on certain assumptions - which one may not agree.

    1. Yes NPS is more like balanced mutual fund but the idea here is to invest in higher yielding product so I choose Equity fund. What product would get what return is totally debatable - so we make fair assumptions.

    2. Agreed Mutual funds are higher cost product but still most of them have been able to justify this cost by delivering higher returns than their benchmark index. NPS managers can only invest in NIFTY stocks thereby limiting their portfolio and returns potential. You might look to ETFs which are again lower cost.

    3. Annuity is not only taxable, has poor returns but also non-liquid as compared to fixed deposits/ government bonds or tax free bonds etc. You would do better to invest in FD for regular interest payout than go for annuity - atleast till the time you can monitor those (may be till age of 70 or 80 years).

    Also with recent flip-flops from government on NPS/EPF we do have lot of regulatory risk in long term government schemes. You never know government might restrict investment only to PSUs/Government bonds for NPS.

    NPS as a product might suit some while others would do better without it. As its personal finance the judgment should be personal.

    • Yes Amit. Agree on your points. However it is important to acknowledge that we are talking about people in 30% tax bracket. Considering that following are my views:

      1. Sure invest in Equity MFs for long team. They are liquid, tax friendly and hassle free. However investing 50K yearly in NPS still make sense. Rather than investing in a debt/balance fund put it in NPS, it is safe and would yield much better returns (given you save 30% on tax)

      2. About governments flip-flops and uncertainty: well the markets are more uncertain, anybody investing in equity by any means is embracing that anyway. Look at the HDFC funds, the fund managers get huge payments even after going so wrong with the investments (and I dont blame them, its the way market behave). So whatever government would do, would do to safeguard the retirement of the people. Got to trust that.

      3. On returns on liquidity, annuity and tax: If you are in 30% bracket, you would most probably have other liquid investments (if not blame it on your advisor). Also 60% of NPS amount liquid, use it the way you want. 40% that goes in annuity is not taxable. Return of any debt instrument is taxable. At age of 60 and above its good to have some peace-of-mind returns amongst other options.

      All in all, if you earn good (30% taxable), and you are not a person who puts all eggs in one basket (say, equity MFs) then 50K yearly in NPS is surely is a good and safe basket to opt for. Your financial advisor might not be paid for that but thats okay, a share of your other MF investments is going to him/her if you are not investing in Direct MF plans.

      • Thanks for your comments, I am sure it would help readers :)

  • Correction: **so the actual amount invested in MFs over a period of time is much lower than NPS!

• Sir, below points i got from http://www.hdfcpension.com/national-pension-scheme/tax-benefits/, which says 40% is the withdrawn amount and it is excempt from tax. It differs from your point, please advice on this
  -Up to 40% of Corpus withdrawn in lump sum is exempt from tax
  -Balance amount invested in Annuity is also fully exempt from tax
  -Pension received out of investment in Annuity is treated as income and will be taxed appropriately

  • The NPS taxation rules were changed in Budget 2016. The calculation above was done before this change was effective.

• SIR I AM A CENTRAL GOVT. EMPLOYEE AND 10% CONTRIBUTION OF MY BASIC+DA IS COMPULSORY TOWARDS MY NPS ACCOUNT TIER-I AS PER CENTRAL GOVT. RULES. CAN I CLAIM THIS CONTRIBUTION AS DEDUCTION UNDER SECTION 80CCD(1B) OR NOT. MY BOSS SAYS THIS CONTRIBUTION CANNOT BE CLAIMED UNDER SECTION 80CCD(1B). IN ORDER TO GET BENEFIT OF ADDITIONAL 50000 UNDER 80CCD(1B) I HAVE TO CONTRIBUTE SEPARATELY (EXTRA THAN MANDATORY 10% OF MY BASIC +DA).

  • Experts have different opinion about "if you claim your compulsory contribution to NPS u/s 80CCD(1B)". My opinion is you can claim it. Income tax department has not clarified it yet. Economic times had a story on this - might be helpful for you.

• can you suggest the procedure

• SIR, I HAVE TAKEN NPS ACCOUNT NO.110006701850 . AND PAY THE AN AMOUNT OF Rs.50000/- through axis bank i have alloted to tier 1 a/c. but my apspdcl offficials has not allowed for full excemption u/s 80ccd(2) kindly given a letter and details my email address. thanking you sir. yours faithfully asrao

  • THat is not a problem, you can take this exemption while filing your IT return.

• Dear Amit Jee,

  Will Axis LT Mutual Fund (G) will fit as equity mutual fund (as given in option 2). I am laymen in this field. I want to invest in Axis LT MF (G) for a period of 20 years as a SIP. Kindly suggest.

  thanks.

  • Axis LT MF is a good equity based mututal fund. But you cannot just invest and forget about it. You should keep on monitoring the fund performance at least every 1 to 2 years!

    • Difference between ELSS and Equity mutual funds..??
      I have ELSS , can i take again EMF..!! for saving taxes..
      please replay to my Id please..

      • ELSS is a type of equity mutual fund, investments in which are eligible for tax exemption u/s 80C with a lock-in of 3 years. You cannot claim tax exemption by investing in any other mutual fund.