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
Hi Amit,
I am 40 years and in 30% tax bracket. Whether investing 50K in NPS for tax benefit under 80CCD(1B) is advisable?
This is something only you can answer or you might want to consult investment advisers. I can just tell about the product, you need to decide if it fits your risk profile and overall investment goals!
Thanks for the reply. I was seeking your advise as an investment adviser. I was wondering with only 40% tax exemption on maturity (rest of the amount will again be in 30% tax bracket) whether NPS will be beneficial?
Which equity mutual funds are good?
At maturity 40% amount has to compulsorily go to annuity purchase. Rest 60% can be withdrawn in lumpsum. Only 20% on NPS corpus is taxable at maturity. Also if you purchase annuity out of 60% corpus nothing is taxable at withdrawal. TO minimize tax you can also withdraw in installments. Know more - NPS – Maturity, Partial Withdrawal & Early Exit Rules
Equity Funds are good not only due to their tax treatment but also they can generate higher returns in the long run!
Hi Amit,
Is section 80CCD(1B) applicable for the financial year 2016-17 ( AY 2017-18) & FY 2017-18 ( AY 2018-19) to get tax rebate in investing Rs. 50000.00 in NPS tier 1 A/C.?
Yes
Sir,
I want to avail tax benefit under 80cc d 1 b,
Will i get tax benifit by investing 50 k in any endowment pension plan
No Sec 80CCD(1B) is only available for investment in NPS Tier 1
Hi Amit
It would be nice if u can advice in current tax secenario. Also give a illustration where in I invest ₹50000in nps and the amount of tax saved on nps that is ₹15450 is invested in equity fund compared to only investing in equity fund. A penne saved is a penne earned. What will be the expected corpus my age is 35yrs
Thanks
Any extra investment in Equity Fund for Long term would be GOOD for you. As the calculation is concerned the investment as of today remains Rs 50K an the maturity shown after tax. There is no instant redemption of Rs 15K when you invest in NPS ....
to get benefit of additional Rs 50000/- under 80ccd(1b) NPS, demat account mandatory ?
NPS does not require demat account. If you have aadhar you can open NPS account online.
I AM 48 YRS, WANT TO INVEST IN NPS FOR ADDITIONAL 50000/- TAX BENIFITS IN EQUITIES, CAN I WITHDARW THE TOTAL AMOUNT AFTER MY RETIREMENT AT ONE SHOT?
No you can withdraw maximum 60% of NPS corpus in lumpsum as you have to buy annuity using atleast 40% corpus. You can read more NPS – Maturity, Partial Withdrawal & Early Exit Rules
While calculating for NPS, the instant tax benefits also should be considered (as per present rules). Those benefits also should be added in the calculation as it saves the tax and is savings to individual pocket.
But the article is good taking into the assumptions and useful for people.
Hello Amit,
Nice article for awareness on NPS. However i have still query that i'm working in Private Sector where there is no pension and job security. In that case should i opt for NPS as disciplined way of saving for creating retirement corpus and pension ? Also currently my salary is above 10 Lacs and after claiming existing investments, i fall under 20% tax slab. What would be your suggestion for me whether to go for NPS or start SIP directly in equity mutual funds for next 25 years ? Also suggest good equity mutual funds for SIP if i have to spread my investment in diversified sectors.
Thank you very much.
Best Regards,
Sushil
You can continue NPS by minimum contribution of Rs 1000 every year. So to invest in NPS or NOT is your call.
As of today SIP in equity mutual funds seem to be better option than NPS - mainly due to the flexibility, higher returns and favorable tax treatment it offers.
can we do stp
Yes that would lead to lower taxation.
If I defer the withdrawal for up to 70 years...then also tax of 30.9% is applicable?? Or 60% of the total maturity amount then is totally tax free??
Deferment does not impact taxation. But at 70 years of age you might have lower income and hence the effective tax applicable to you would be lower!
I am 56+, can I invest in NPS to save tax u/s 80ccb
Yes you can open NPS account. But you can contribute only up to age 60. SO make a calculated move.