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:
Everyone hates paying taxes and always are on lookout for Options to Save Tax. However…
Are you worried and confused about Lien amount in SBI? Well you are not alone.…
Get details of latest Sovereign Gold Bond Price, Issue details, taxation and how to invest.…
Download the Excel based Income Tax Calculator India for FY 2020-21 (AY 2021-22). This compares…
Piramal Capital & Housing Finance, has come out with Piramal Capital & Housing Finance Ltd…
IIFL Home Loan, the Housing Finance company from IIFL Group has come out with IIFL…
View Comments
I AM A RETIRED GOVT. PENSIONER OF 62 YEARS OLD. WHETHER WILL IT BE ANY HELPFUL FOR ME TO INVEST IN NPS. I HAVE BELOW RS.FIVE LAKH TAXABLE INCOME AFTER INVESTING PPF UNDER 80C(FULL COVERAGE)
Sir you cannot invest in NPS as the age limit for opening & investing in NPS is below 60 years!
Sir, Is it mandatory to invest every year with same amount after entering into NPS under 80ccd-1b
No to keep NPS account active you need to invest minimum Rs 1,000 every year. So its NOT mandatory to invest same amount every year!
i am a haryana govt. employee.can i get additional tax benefit over 150000 if my contribution is more than this amount.
Yes you can get tax benefit up to Rs 2 lakh on investment in NPS if you take both 80CCD(1) & 80CCD(1B) together!
Sir my 80c investment is:- Lic=16949 ,PLI=62786,GIS=360,Tution Fee=34680,NPS=50521. Total=165296plesecalculate it
Is ELSS better than NPS if ELSS does not offer any tax benefit
Without any tax benefit, ELSS is better than NPS as you have more flexibility to use the maturity amount. In case of NPS you have to invest 40% in annuity which is not very good product. Also there is limited lock-in for ELSS while in case of NPS its hard to withdraw all amount before 60 years of age if you plan early retirement!
hey i m lalit.i recently got a gov. job.....pls recommmend me should i go for NPS or equity mutual funds
In case of government job you would anyway have NPS account (10% of basic + DA). So to diversify you should choose equity mutual funds. Also read 15 Personal Finance Tips for your First Job - might be useful for you!
sir my investment
80c
1-lic 50000,
2-ppf 100000
80ccd 1-nps my contribution 60000
total 210000 = 150000
80ccd2 govt.10% 60000= 60000
total 210000
so what about 80ccd1(b) 50000???????
the tax exemption limit for 80CCD(1) along with 80C is 1.5 lakhs. You can show your NPS contribution up to Rs 50K u/s 80CCD(1B)
I am a government employee. I have invested Rs 1.5 lakh 80C. I also contribute around Rs 64,000 per year to National Pension System (NPS). The government, my employer, also contributes a matching amount. I want to know whether I can claim my 80 C investment of Rs 1.5 lakh under Section 80C and the additional Rs 50,000 under Section 80CCD(1) on my contribution to NPS?
Yes you can show your contribution u/s 80CCD(1B)
Is this Rs 50000 NPS saving option avaliable for govt employees who have joined before 1.1.2004?
Will they get tax benefit if they open NPS tier one account and save Rs 50000 only.
Kinldy calrify
Thank you.
Yes this is available to everyone. you can open NPS account and get this benefit!
I am TN Govt employee. I joined contributory pension scheme in TN Govt. Is it eligible for my contribution 10%(BP+DA )@ 80CCD(1B)?.CPS is equal to NPS?
Thank you. what is meant by tier 1 plan?
NPS has two tiers.
Tier -I account is the primary account and the contribution to this account is locked till retirement.
Tier- II account is optional saving account and deposit and withdrawal to this account can be done anytime.
yes CPS is equal to NPS and you can claim benefit u/s 80CCD(1B)