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.
- As 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)
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
Sir, Somewhere I read that NPS account should run for a minimum period of 10 years. Pl. Clarify. Now I am 56 years old. I want to invest for 4 years and take back the total amoun one year after retirement(below 2 lakhs). Kindly guide.
You can close NPS account when you are 60 years of aage. So go ahead and invest without worry.
I have opened NPS account online…if I contribute under tier 1… Will it be eligible for cc’d 1b.
Yes it would.
I want to know is NPS a better option than equity mutual funds? Now that the long term capital gains on them are taxable. Please publish a similar article with the latest budget scenario. I think now as per this year’s budget, NPS will be become a better option in the long term.
with new LTCG, Is your illustration still holds good ?
The mutual fund corpus at maturity would reduce by Rs 8.6 lakhs due to LTCG tax and hence would become less attractive. However for 30 year period its difficult to just take call based on taxation. Mutual Fund in general are better investment while NPS without tax saving investment is badly designed and ever changing product.
My joining date is 1 april 2009 it’s mean I am a NPS time employee of state govt my question is my deduction in 80c(150000) is complete with my investment in LIC and ppf may I transfer my employer share in 80ccd(1b) to take benifit of deduction of rs 150000+50000=200000/-
Please describe which section is applicable for that
No you cannot claim tax benefit of employer NPS contribution u/s 80CCD(1B). However you can claim tax benefit for your contribution
Whether it is applicable in tier-1 or tier-2
tax exemption is applicable for NPS tier 1 only