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.**

## Assumptions:

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.

- NPS Investment Option: Most Aggressive i.e. 50% investment in equity and 50% investment in debt
- Amount Invested Annually: Rs 50,000
- Return on Equity: 12%
- Return on Debt: 8%
- Tax Bracket: 31.2% (surcharge revised in Budget 2018)
- Also the tax bracket remains 31.2% at the time of withdrawal at the age of 60.

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.**

## Significant points:

- For
**people in lower tax brackets, investing in Equity Mutual Fund becomes much better option**as compared to NPS. This is because the tax outgo is lesser and hence more money is invested in MF. - A
**s the duration of investment goes up the mutual fund option becomes even better**due to compounding at higher return rates. **You might be in lower tax brackets at the time of investment; but might fall in highest tax bracket while withdrawing NPS**as it would be accumulated over a long period of 25 to 40 years.- With the new rules you can split your withdrawal till the age of 70 – lessening you tax outgo.
- You need not purchase annuity if the NPS maturity corpus is less than Rs 2 Lakhs.

## Should People nearing Retirement Invest in NPS?

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.

- Anyone who is below 65 years of age can open NPS account – so technically you can open your NPS account.
- Assuming you are 62 years or more and the tax exemption stays for next few years. You can invest 50,000 every year for 3 years. With 10% annual returns your NPS maturity amount would be less than Rs 2 lakhs.
- As per rules, you need not purchase annuity if the maturity amount is less than Rs 2 lakhs. So after retirement you can withdraw the amount without much tax burden.
- You can also time the withdrawal to a year (but before reaching 70 yeas of age) when the tax liability is lower or split the withdrawal in 10 installments.

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.

## Conclusion:

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:**

- The NPS tax benefit may be done away in future but you are ready to continue the same with minimum annual investment
- Tax on investments keep on changing and tax on both mutual funds & NPS can change in future
**Equity Mutual Funds would outperform NPS in most cases**- NPS would outperform if compared to fixed deposits (in most scenarios)

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 🙂

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’

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

provide detailed calculation on 27.95 lakhs and 73.7 lakhs

Sorry could not get your question. Please be more detailed. thanks

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?

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.

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)