Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

Invest in NPS to Save Tax

Invest in NPS to Save Tax

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

Should you Invest in NPS to Save Tax u/s 80CCD (1B) - Revised Calculation after Budget 2018

Should you Invest in NPS to Save Tax u/s 80CCD (1B) – Revised Calculation after 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.

Download: Free ebook for Income Tax Planning for FY 2018-19

Significant points:

  1. 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.
  2. As the duration of investment goes up the mutual fund option becomes even better due to compounding at higher return rates.
  3. 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.
  4. With the new rules you can split your withdrawal till the age of 70 – lessening you tax outgo.
  5. 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:

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

380 thoughts on “Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

  1. How I can Invested in NPS. please suggest.

    • Go to the NPS Website and start filling details as asked. If you have aadhaar number you can open NPS account instantly online.

  2. SHRAWAN KUMAR MISHRA says:

    I am govt.employee covered under NPS. Total NPS from my salary is around 59000/- . My gross salary is 7.25 lakh. I have invested Rs. 1.10 lakh in ELSS. Whether should I invest 40000 more in ELSS or PPF. confusion is regarding the NPS amount deducted from salary. Whether it comes under 80CCD(1B)?

    If NPS deducted from salary is a pert of 80C, then I won’t invest more in ELSS for current financial year.

  3. Hi Amit, I am Suman, a Central Govt employee. I have exhausted my savings limit of 1.5 lk.(LIC, PPF, Stamp duty for purchase of property, Hosing loan principle etc). My compulsory deduction towards NPS tire 1 is around 49000. My employer is not ready to show the nps subscription under 80CCD(1b). According to them I have to make additional contribution of 50000 towards tire 2, to get the benefit. Last year my previous employer gave me the benefit. Today I visited the Income Tax office in Pune. They also told that 80CCD(1b) is for tire 2 investment only. Can you please help me out.

  4. harvinder pal singh says:

    Hello Mr. Amit Ji,

    My total saving including NPS is over 175000/- (125000 LIC + 50000 NPS).
    My office added 50000 additional in my total salary i.e. 548789 actual salary and 50000 NPS (Total Rs. 598789/-).
    Can you suggest it is right to add NPS employer contribution in my total salary.
    Regards.

    • Yes it seems employer has added their own contribution to your salary. You need not worry as that is tax exempt u/s 80CCD(2)

  5. 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.

  6. 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!

  7. 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.

  8. 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

  9. IS Stamp duty and registration charges and other expenses related directly to the transfer are also allowed as a deduction under Section 80C,

  10. 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.

  11. what is best is nps good for investment

  12. DR C H KAUTISH says:

    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!

  13. Brilliant Explanation !! Good one

  14. Divyang Mehta says:

    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 !!!

  15. Hi Amit,

    Thanks a lot for eye opening regarding NPS, I was about to open NPS account and I wont do that for sure. looking at long term investment, that to with max tax wont be good option.

    I work in private sector age is 35 Years, My earnings fall in to 30%.In form-16 I am done with 80C, Home loan, PF. not sure where I can save my Tax any more. I would appreciate if any option you can suggest.

    I dont have any education loan, mediclaim is already done, I am not eligible for RG Equity Saving Scheme.

    Not sure if I have any option to save my tax, or just keep paying it at maximum.

    Regarding Long term MF investment, do we need to specify it is going to be long term and mention number of years while investing in MF? What is the minimum number of years i have invest to eligible for long term, just want to insure my long term captial gain from MF is tax free.

    I am already doing MF investment through SIP. investing perticuler amount to

  16. Vishal Sharma says:

    Hello Mr. Amit,
    Have we missed here the yearly Tax save amount of Rs. 15450 which we can invest every year for 30years. And at a low risk we get a return of 10% annually. So investing for 30yr Rs 15450 [email protected]% we get Rs. 27,95,573.
    So NSP seems to be better in any case.

    What’s your view?

    Regards,
    Vishal Sharma

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