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, Somewhere I read that NPS account should run for a minimum period of 10 years. Pl. Clarify. Now I am 56 years old. I want to invest for 4 years and take back the total amoun one year after retirement(below 2 lakhs). Kindly guide.
You can close NPS account when you are 60 years of aage. So go ahead and invest without worry.
I have opened NPS account online...if I contribute under tier 1... Will it be eligible for cc'd 1b.
Yes it would.
I want to know is NPS a better option than equity mutual funds? Now that the long term capital gains on them are taxable. Please publish a similar article with the latest budget scenario. I think now as per this year's budget, NPS will be become a better option in the long term.
with new LTCG, Is your illustration still holds good ?
The mutual fund corpus at maturity would reduce by Rs 8.6 lakhs due to LTCG tax and hence would become less attractive. However for 30 year period its difficult to just take call based on taxation. Mutual Fund in general are better investment while NPS without tax saving investment is badly designed and ever changing product.
My joining date is 1 april 2009 it's mean I am a NPS time employee of state govt my question is my deduction in 80c(150000) is complete with my investment in LIC and ppf may I transfer my employer share in 80ccd(1b) to take benifit of deduction of rs 150000+50000=200000/-
Please describe which section is applicable for that
No you cannot claim tax benefit of employer NPS contribution u/s 80CCD(1B). However you can claim tax benefit for your contribution
Whether it is applicable in tier-1 or tier-2
tax exemption is applicable for NPS tier 1 only
How I can Invested in NPS. please suggest.
Go to the NPS Website and start filling details as asked. If you have aadhaar number you can open NPS account instantly online.
I am govt.employee covered under NPS. Total NPS from my salary is around 59000/- . My gross salary is 7.25 lakh. I have invested Rs. 1.10 lakh in ELSS. Whether should I invest 40000 more in ELSS or PPF. confusion is regarding the NPS amount deducted from salary. Whether it comes under 80CCD(1B)?
If NPS deducted from salary is a pert of 80C, then I won't invest more in ELSS for current financial year.
Yes your NPS contribution can be considered in 80CCD(1B), hence you can invest additional Rs 40,000 as per your risk. We had done a post on how to choose 80C investment which might be helpful.
Hi Amit, I am Suman, a Central Govt employee. I have exhausted my savings limit of 1.5 lk.(LIC, PPF, Stamp duty for purchase of property, Hosing loan principle etc). My compulsory deduction towards NPS tire 1 is around 49000. My employer is not ready to show the nps subscription under 80CCD(1b). According to them I have to make additional contribution of 50000 towards tire 2, to get the benefit. Last year my previous employer gave me the benefit. Today I visited the Income Tax office in Pune. They also told that 80CCD(1b) is for tire 2 investment only. Can you please help me out.
80CCD(1B) is for Tier 1 investment in NPS. There may be some confusion at your employer end. However you can take the benefit while filing your tax return.
Hi Amit, waiting for your reply.....
Hello Mr. Amit Ji,
My total saving including NPS is over 175000/- (125000 LIC + 50000 NPS).
My office added 50000 additional in my total salary i.e. 548789 actual salary and 50000 NPS (Total Rs. 598789/-).
Can you suggest it is right to add NPS employer contribution in my total salary.
Regards.
Yes it seems employer has added their own contribution to your salary. You need not worry as that is tax exempt u/s 80CCD(2)