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
If we consider in case 1, amount 15450 saved per year is invested in mutual funds, so actual investment in NPS comes down to 34550 per year, though it gives return on 50000 per year. taking that in consideration the maturity amount will be much better in case 1 of NPS. Also eventually we can expect the tax outgo on withdrawal to be exempted in next 30 years. what do you think?
If you invest Rs 34,550 in NPS you will get returns on the same. If you are considering investing additional Rs 15,450 saved in taxes - this means you invest Rs 50K in NPS then only you save Rs 15,450. So in total you would be investing Rs 50K+Rs 15.5K. So the assumption does not hold good.
The best case scenario - I can say that NPS for Government Employees might become tax free eventually but I have my doubts about Corporate Sector NPS. And you can find several such different taxation on benefits between Government employees and others like Gratuity, leave encashement, etc
In Option 2 also, total money outgo will be Rs 50K (Equity MF)+Rs 15.5K (taxes). Thus Vipul and Jasgun's points (above) does make sense and would be the right way to compare the two.
Abhinav - Please check the calculation for Option 2. The amount invested in 34.5K after paying 15.5K as taxes while in case of NPS we have assumed investing Rs 50K.
Very Good analysis. I want to know what are the best mutual funds that can be invested in?
my employer is contributing as part of Corporate NPS.
when I am contributing additionally, it is allowing only for Tier 2,
For Tier 1, it is not allowing, as it is corporate account.
can I claim 50K deduction, if I contribute to Tier2 account of my NPS.
Tax exemption is only eligible on Tier 1 NPS accounts. In this case you can open a different account or talk to your employer to get the TIER 1 NPS enabled.
Hi Amit,
Is this tax saving on NPS applicable on tax filing for AY 2015-16 or AY 2016-17?
My employer has opened a Type I account for NPS and I don't have an option to withdraw it, not sure can I save the tax this year or next year?
Thanks,
Bhavesh
This additional tax exemption on NPS is applicable for AY 2016-17 (FY 2015-16) onward.
Your employer might have opened Tier 1 account. Yes you can deposit additional amount in this account to save tax.
Thanks Amit. Really appreciate your response.
Is this works for salaried employees who has already NPS account
Yes it works for everyone with existing or new NPS accounts
Thanks for the promt reply Amit. Your article is indeed an eye-opener.
Thanks :)
Hi Amit,
Great article. I have 1 question about 80CCD(1B).
For claiming this benefit do I first have to exhaust 1.5 Lacs eligible in NPS and the invest additional 50000 to get this benefit or I can just invest 50000 to get this benefit.
Thanks,
Bhavish
You can just invest Rs 50,000 in NPS to claim benefit u/s 80CCD(1B).
Dear Amit. Can you share the income tax rule substantiating this..
One can just invest Rs 50,000 in NPS to claim benefit u/s 80CCD(1B).
Thank you.
Hi Amit,
I just want to know about NPS exemption under 80C . e.g if xyz has already invested 1.5lac under 80C and also planing to invest in NPS (50,000/-) will he get exemption of INR 2,00000/- under 80C?
Yes exemption of Rs 50,000 by investing in NPS is in addition to Rs 1.5 lakhs exemption u/s 80C. So in total you can claim exemption of Rs 2 lakhs
Good read...though i was little late to do so. Very precise and simple to understand.Thanks
Thanks :)
Great effort to help blind tax savers...
Please share the same with your friends and family :)