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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hi i already invest in nps 50000 per year,at the time of my death ,what my nominee shall getting from nps
Hi Amit,
My CTC is close to 30 lakhs p.a. and I fall under 30% tax bracket. My 80C limit of 1.50 lakhs is already fully utilized due to EPF/ LIC/ Home loan/ Tuitions.
My employer has not opted for Corporate NPS payments. Hence, I myself need to contribute to NPS to save tax. Please suggest the amount (If i contribute only Rs. 50000 will i get the benefit of new section)?
Regards
Ashish Malik
I am at age of 45 and falls in 20% tax bracket, does NPS is suitable. As per above example MF is more better. Please suggest.
My wife contributes 1.5L in LIC and 50000 in NPS .But in Form-16 given by employer shows both under 80C hence total deduction restricted to 1.5L. can I claim 1.5L LIC In 80C and 50000 in section 80CCD(1b) while filling tax return to have additional benefit of 50000.Please advise.
Respected sir i am a govt. Employe having contribution under nps rs 90000/- lic rs 50000/- and repayement of principle of house loan rs 1lkh. Kindly tell me who to do my tax deductions.
I am a gov employee . My total contribution in 80c, 80ccd(1), 80ccd(2) exceed 1.5 lac. Can i claim my contribution (10% of salary duducted every month) in 80ccd(1B) for additional benefit of 50k. so that i can adjust my other investment (lic) in 80C???
I am investing ₹50000/every year in tire _1.when I take/withdraw all my invest money?my age now is 58years.
you can withdraw when you are 60.
My CTC is fall under the 30% bucket as govt has changed so much rules on nps and seems this article is old.
Please let me know if still equity mutual funds are better option than nps even after LTCG deduction on MF.
Thanks,
Vinod
Both NPS and equity mutual funds are comparable. Have updated the comparison to include LTCG of Mutual Funds. have a look at calculations and decide fro yourself!
Can 10% NPS deduction from my salary claim u/s 80CCD1 B if my PPF or other investment of Rs 1.5 lakhs complete with u/s 80 C with limit to that amount?
yes you have the option to choose if you want your NPS contribution in 80CCD(1) or 80CCD(1B)
Any kind of written documents mentioning clearly 10% deduction from salary can claim u/s 80CCD 1B because my DDO has deducted tax saying additional contribution to NPS only u/S 80CCD 1B
please provide me that document so that I can prove
Please refer to income tax website.
I am a central gov employee . My total contribution in 80c, 80ccd(1) exceed 1.5 lac. Can i clain my contribution (10% of salary duducted every month) in 80ccd(1B) for additional benefit of 50k.
yes