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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I am a employee of private company. My company deducting EPF from my salary. In my company there is no NPS.
I would like to deposit Rs. 50000 to enjoy tax benefit u/s. 80ccd(1B). How can I invest the amount, as I do not have NPS 1 account.
My company deducting EPF and I am enjoying the tax benefit u/s 80 C.
Regards.
C V Pillai
I am govt employees and investment Rs. 50000 in NPS in Financial Year 2019-20. Whether i can expetion u/ s 80ccd(if). Pl advise
Sir I am defence personnel can I joined NPS .Will also govt contribute same .
Good article.
But if you consider following points then it will be excellent.
1. What will be the effect over maturity amount, if we invest the tax saved by NPS (15600/-) to equity/debt/other?
2. Consider the breaking up of maturity amount in second option (ie when we invest 34600/- in equity) into the 40% & 60%, so that it will be more camparable & understood. For example we get 6-7% over rest amount by NPS but with Option-2 it will be 10-12%.
I have completed investment of 150000/ under 80C. Is it allowed to save 50000 by investing in NPS apart from investment of 150000 under 80C.
My question is also same.
Please clarify whether NPS holder can claim rebate under Section 80 C and under section 80CCD(B) ?
Sir,
I am a student and have just started working and hence do not know much about the products in Finance. But I was just researching about NPS and came across the EEE status. You have attached the calculation in the above article wherein a tax is charged at the withdrawal. I am confused. Does EEE status not mean tax exempt at all three stages? If today the withdrawal is tax free is then investment in NPS worth and beneficial?
i am also having same doubt as of you, out of maturity amount, 60% is tax free and with remaining 40% has to be used to bought annuity. in the above example, why tax calculated on 20% of maturity?
Could you update the post for considering the impact of recent rules changes:
– making the 60% corpus tax exempt, so no impact of tax bracket at time of withdrawal
– allowing upto 75% in equity in active choice so returns would be around 11% (8%*0.25 + 12%*0.75)
My own rough calculations seems to indicate that the 60% corpus in-hand will be around 85% of the post-tax corpus generated by investing in MF, this compares much more favourably than before
You are right, I will refresh the calculation in few days.
Thanks for the detailed analysis Amit! Could you update the post for considering the impact of recent rules changes:
- making the 60% corpus tax exempt, so no impact of tax bracket at time of withdrawal
- allowing upto 75% in equity in active choice so returns would be around 11% (8%*0.25 + 12%*0.75)
My own rough calculations seems to indicate that the 60% corpus in-hand will be around 85% of the post-tax corpus generated by investing in MF, this compares much more favourably than before. :)
Hair sir am manjunath I invest 35000 in NPS Tire 2 can I Clim the tax benifit
I do not agree your calculation. While calculating NPS, you need to also consider the tax saving which you did when you invest in NPS. If a person is in 30% bracket, he would save Rs.15600 (which is a tax amount). So he will have that additional 15600 cash in his hand. So you need to add the total tax savings which he made over the period. and you need to add some Bank interest rate for that extra savings. In that case, it will be
End of year 1 - Rs 55000 (as per your calculation) + (15600 + Bank interest) so at the end of year one,it should be (55000+15600+bank interest on 15600)
I am above 65 years. I do have a nps account. Can I invest upto Rs. 50,000/- and get tax benifits under sec 80 CCD (1B) this financial year ???