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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Yes, NPS certainly is not that lucrative considering the current tax laws.
However, if the tax laws change in future and equity gets taxable at anytime in the next few decades, the whole equation may change.
agree with your assessment!
Hello Amit,
Thanks for such good discussion on NPS. I have a interesting problem on my side and need your input. I am from a organization where EPF is very minimum (2000 per month), I do not have PPF till now (even after 10 years in job). However have stable real estate property, medical policy, life insurance policy and cash needed for next 4-5 years of survival. Now I want to invest in safer side of investments(for retirement), should I go for PPF or NPS or just trust Debt and Balanced funds?
Thanks in advance,
Sharad
PPF has investment limit of Rs 1.5 lakhs per year. You can exhaust this limit and then keep on with your mutual funds. NPS is not a great product (until you want to save tax) and has frequent change in its rules!
Dear Amit ,
Good Day!
Hope you are doing good !
Can you help me how can i opt for 80ccd (1) and 80ccd(2) and 80ccd(ib) .
Which scheme i can opt for availing above 2 section.
Have explained all 3 sections of NPS here.
Hiii i am 58 years old i want to invest in nps 80 ccd(1b) and i have also invested 150000 u/s 80c . So can i get that other 50k deduction if i invest 50000 in that section for first time in NPS
yes you can get tax benefit u/s 80CCD(1B)
IS Stamp duty and registration charges and other expenses related directly to the transfer are also allowed as a deduction under Section 80C,
Its just the stamp duty.
Hello mr Amit,
in the above one of the replies you have replied that
"For equity mutual funds to qualify for long term the holding period should be more than 1 year"- Do we can withdraw the amount that we have invested after completion of one year (or) any specific maturity period is applicable such as 10 or 15 or 20 years that we need to opt for.
Thank you.
For most equity funds there is no restriction on when you can withdraw. You can do it even on next day of investment. However its tax free only when redeemed after 1 year of investment.
what is best is nps good for investment
I am rtd Govt official and want to open account under National Pension System. I am 64+ Pl clarify whether I will get tax rebate of Rs 50000/- over and above of Rs 1.5 lacs under 80 C IF I deposit Rs 50000/- during 2017-18 or not
Yes the NPS account opening age has been increased to 65 years and hence you can open NPS account to get tax benefit!
Brilliant Explanation !! Good one
Hi amit
Thank you very much to give the conclusive details about NPS.
Hey, I just wanted to know that how you had calculated 5.59 lac tax at maturity in first example and 16.30 lacs tax on second example . in first Example you had calculated on total corpus (ie. 90.0 Lacs *20%=~18 lac *30.9% =5.59lac ) while in second example you had calculated on 54 lac *30.9% = 16 lac approx.
So how slab wise calculation impacted on maturity ?
Thank you !!!
Thank you ???????????????????????? for your prompt response
Budget 2016 had changed the NPS taxation at withdrawal. Now only 20% of lumpsum withdrawal is taxed while earlier it was the entire lumpsum withdrawal leading to this difference & hence need of new calculation.