Do Not Invest Rs. 50,000 in NPS For Saving Tax!

Update: Krishnan Muthusubrmanian pointed out a flaw in my analysis. The case for not invested in NPS is much stronger. Apologies for the inconvenience.

After budget 2015, the following tax deductions are applicable  to the National Pension Scheme.

(1) An individual can invest a maximum of Rs. 1.5 Lakhs in Tier 1 for tax decuction under Section 80CCD(1) which is part of 80C.

The employers contribution falls under 80CCD(2) and is sepearate from the 80C limit of Rs. 1.5 Lakhs.  There is a misconception that there is no limit for tax deduction under this section. This is not true.

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The even lower stress retirement calculator!

This post is a sequel to the low-stress retirement calculator  published a few months ago. With this calculator, you can reduce the total retirement corpus required by about 10%-12% for normal retirement (age 60)  and the monthly investment required by 20-30%.  The reduction could be even more significant in the case of early retirement.

How is this possible?

Most retirement calculators (including all of mine published thus far) use a single rate of return post-retirement. Instead of this, why not use a bucket strategy?

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Tax Efficient Investment options for Short-Term Financial Goals

Now that there are no major changes to mutual fund taxation in budget 2015, let us take a look at the investment options available for short-term goals.

First let me take a swipe at Value Research online. On 5th Feb. 2015, it reported that “According to a person familiar with the development … the forthcoming budget is likely to term these funds as debt funds for the purpose of taxation“.

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Budget 2015: Revised Dividend Distribution Tax

The dividend distribution tax associated with debt mutual funds (dividend payout and dividend reinvestment options) has been hiked again in this budget.

Last year, the government changed the way in which the DDT was calculated. (read more here). The DDT hike by a huge extent: from 22.073% to 28.325%.

This year, they have increased the surcharge on the DDT from 10% to 12%

DDT after Budget 2014

Tax: 25%,  Surcharge: 10%, Cess: 3%

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Budget 2015: Tax-Free Infrastructure Bonds

So tax-free infrastructure bonds for infra projects will be issued.  Assuming they would be similar in nature (payouts will be tax-free) to the ones issued earlier, look before you leap.

For those far away from retirement: Why would you want to invest in a product that offers no compounding?

If I have access to a lump sum, I would be better off investing in a productive asset like equity.

What if I invest in a tax-free bond and invest the tax-free payouts in equity? That is like trying to rub your nose with your tongue, when your hands are free?  Anyway, if you are interested in this, check this out:

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