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
excellent post and complete analysis but one point to clarify ...........their is also option of making withdrawal so if i can make a phase withdrawal so as to decrease my maturity amount and thus decreasing my maturity tax payable ?
Since March 2013, PFRDA has replaced ‘phased withdrawal’ with ‘deferred withdrawal’ option in NPS. So now you cannot withdraw in phased manner but you can defer your withdrawal to future years.
Great Article Amit.
Thanks :)
Also if you invest RS 15540 i.e the tax benefit that you get on investing Rs 50000 in NPS at a conservative return of 10% on Balanced MF will get you Rs 27.95 Lakhs and if you add that to the after taxable corpus of NPS 37.51 Lakhs + 36.19 lakhs = 73.7 Lakhs will mount to Rs 101.65 lakhs.
So investing Rs 50000 on NPS and investing the tax savings is far better than paying tax on Rs 50000 and investing the balance on MFs'
provide detailed calculation on 27.95 lakhs and 73.7 lakhs
Sorry could not get your question. Please be more detailed. thanks
Sourav
The 15,540 saved in tax comes from the Rs 50,000 invested. The calculation you are doing takes investment in NPS as Rs 50,000 and additional investment of Rs 15,540 in balanced fund making it total of Rs 65,540. This is not right assumption!
You really got a point!!! It will be interesting to check the financial plan totally rather than checking individually
You have opened my eyes to avoid NPS and choose MF.Thanks
You are welcome :)
This is one of the best article I have read on NPS. Rest all are not very clear on providing an efficient comparison on the two, but this one nails it.
Thanks Amit sir
:) Thanks
Sometimes we are so obsessed with taxing saving and we end up penny wise and pound foolish. Article is indeed a good read and offers refreshing perspective.
Thanks :)
Really nice demonstration of NPS and comparison with MF.
one doubt, after age of 58 if somebody retires than how come he will be in 30 % tax sab at 60 years i.e. NPS maturity time?
At maturity you are looking at a large sum of money accumulated in entire working period. If you look in the case discussed in the post, even investing Rs 50,000 every year you would be eligible for Rs 55 lakh lump sum withdrawal. This might be taxed at higher rates (though we cannot predict the tax rates)
I withdraw my previous comment and question and hope that govt would take some steps to cut down taxes on maturity amount of NPS in future budget.
Yes
my ege is 56 year can I invest 80ccd(1b) for tax pupose