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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Ye 80ccd1(b) kya h
Amit, please clarify one thing here. 40% of corpus must be invested in annuity which is tax free. Furthermore 40% of the corpus is tax free. Does this mean effectively only 20% of the corpus is taxable if 60% is withdrawn?
If yes, then effectively your calculation for the example above (Option 1) changes to Rs. 5.591046 tax payable on maturity. This too can be significantly minimized if one does not need all the money in one go and can afford to do a phased withdrawal till the age of 70.
Regarding Option 2, you failed to take into account one crucial point, the extra tax outgo caused by not investing in NPS i.e. 30.9% of 50k = 15450/year. Over 30 years, that's an outgo of 4,63,500.
5.59 lacs vs 4.63 lacs - Yes, option 2 still wins but the margin is ever so narrow now that most people can safely choose to go either way. And let's not forget that the government has it's eyes on LTCG.
Budget 2016 has made NPS more tax efficient. The calculation is pre Budget 2016 and would change with the new tax laws.
In option 2 the invested amount is Rs 35K which is after paying tax of 15K on 50K for not investing in NPS. So the calculation does not change from that perspective. Also annuity is poor yielding and taxable investment!
The above calculation is true mathematically. But the question is would a person invest in Equity mutual fund if he does not invest in NPS - as saving tax plays a big incentive and makes one disciplined. My guess is for most people might skip NPS and keep money in savings account or fixed deposit or just blow it - in which case NPS would be better option.
Can I invest only in 80CCD (1B) without investing in NPS for 1,50,000/- in the first place? Say I invest in PPF, LIC, ELSS for Rs 1,50,000/- and can I invest only for 80CCD(2)?
What will be tax treatment at the withdrawal as per the latest budget in this case?
You can invest 50K in NPS to get tax benefit u/s 80CCD(1B). You cannot get tax benefit u/s 80CCD(2) as it's only valid for employer contribution. Budget 2016 has proposed tax on 60% of the NPS corpus at maturity. So 60% of NPS maturity amount would be added to your income for that year and taxed at marginal tax rate applicable to you.
if i invest 50k this year, i will save tax of 10k. this is not accounted, lol
Can we opt 100% equity and 0% debt in NPS? If yes, why didn't you compare using this option?
You can opt for maximum 50% equity allocation. you can read more about NPS here.
Sir I am a govt employ my gross income is Rs 542544 and 10% contribution Rs 51532. And my insurance policy is Rs 1.52 lakh canl l get tax rebate Rs 2 lakh ?
yes
Sir I want to know What is 80CCD(1B)
The post above is about the 80CCD(1B). Let me know if you have any specific questions
Sir I am a govt employ and my gross income is rs 542544, my lic investment is rs 150000 and NPS contribution 51526 and govt contribution is same I want to know will l get how much tax rebate
You would get tax rebate of 1.5 lakh u/s 80C and Rs 50K u/s 80CCD(1B) for investment in NPS. Also the employer contribution in NPS is tax exempted.
I am a central government employee working under Ministry of Agriculture. One of my officer is GPF (General Provident Fund) A/c holder and he want to avail the additional tax benefit under NPS u/s 80CCD(1B). Please clarify that, whether all the employees can avail this tax benefit who have joined the service before 01-01-2004 or only NPS employees can avail who joined after 01-01-2004.
NPS tax deduction u/s 80CCD(1B) is available for everyone irrespective of he is government employee or not. So yes your officer can avail this benefit. Also opening NPS account takes 2-3 weeks so if you are looking to invest in the same, deposit your application form at the earliest.
So according to you, instead of investing in PPF & NSC, invest rather in Equity Mutual Fund . Am i right?
Equity Mutual funds generally give higher returns in the long run and the best part is this is tax free. PPF is good as it's the best debt investment option as it has no risk and also the returns are tax free. NSC to me does not make sense. You can read more about 80C investment options and my take on each of them.