Budget 2015: National Pension Scheme

I missed the live budget speech and spent the entire morning in the woods of IIT, Madras with my son creating ripples in a pond and searching for insects. When I checked the budget highlights I found nothing spectacular from a personal finance perspective (the only one I can understand). Since no bad news is good news, this is something to cheer about.

I can't find anything about mutual funds. Perhaps there is some reference to them in the annexures of the official document.

More clarity is required wrt tax-free infra bonds. Increase in 80D deduction limits means nothing. One must have the money to afford the higher premium.

Now let us get to the National Pension Scheme.  Amused to see a few mentions in the speech. This is what the finance bill says:

  • The limit on deduction on account of contribution to a Pension Fund and the New Pension Scheme is proposed to be increased from Rs 1 lakh to Rs 1 .5 lakh.
  • To provide social safety net and the facility of pension to individuals, an additional deduction of Rs 50,000 is proposed to be provided for contribution to the New Pension Scheme under Section 80CCD. This will enable India to become a pensioned society instead of a pensionless society

1) NPS tax deduction limit is Rs. 1.5 Lakh

I thought it was increased last budget itself! One should not opt for NPS because of this feature alone. Thankfully ELSS funds still exist.  So PPF+ ELSS funds is all that one needs.

2) Additional deduction of Rs. 50,000 

This means investors can now get a  maximum tax benefit of Rs. 2 Lakhs.  Thanks to Krishnan Muthusubramanian of AIFW for pointing this out. This is great news for people like me whose contributions already exceed Rs. 1.5 Lakh.  But do not take this seriously and invest in NPS (see below).

3)  Govt wants to offer a choice between EPF and NPS

Even if this materializes (a BIG if), do not opt for NPS in a hurry.

(a) If you intend to retire early stay away from NPS. It will lock your money in an annuity: 80% will be annuitized before age 60 and 40% afterward. It is a waste of corpus. Stick to EPF.

(b) EPF has finally been streamlined with online access, integration across jobs etc.  NPS is a baby. It has not matured as a product and transferring accounts is a pain.

(c) If you contribute to NPS and employer contributes to EPF, it would be a mess. If you employer also contributes for NPS, opt for it only if you will not change jobs. Else dont.

(d) EPF proceeds is tax-free. NPS is not.  If an option is provided, NPS also should be made tax-free. Let wait for clarity. Fingers crossed.

(e) NPS will be volatile. Use EPF for your debt portfolio and use equity mutual funds or stocks  instead of using the equity option in NPS. Diversified mutual funds will be better managed.

Verdict:  Stay away from NPS. Use EPF +PFF for debt and ELSS+ diversified mutual funds +stocks (if you are up to it) for retirement.

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37 thoughts on “Budget 2015: National Pension Scheme

  1. Nikhil

    please enlighten me if i am wrong. But if i understand correctly 50k in NPS will be extra for 1.5lac limit of 80c. So isnt it wise to invest the money in NPS if total taxable income is getting reduced by 50k?

    Reply
  2. Nikhil

    please enlighten me if i am wrong. But if i understand correctly 50k in NPS will be extra for 1.5lac limit of 80c. So isnt it wise to invest the money in NPS if total taxable income is getting reduced by 50k?

    Reply
        1. Chaitanya

          We can minimize tax on maturity by withdrawing it in phases by trying to make sure that the amount is not above taxable limit (as we retire by then and wont have any active income), so that we wont have to pay tax on maturity.

          Also, in next 20 years, who knows the taxable limit: it may increase from 2.5L to 6L.

          Also, its clear that govt tries to incentivise NPS in some form or other.. NPS also may get favorable EEE treatment like PPF to please taxpayers before next election or the one after that 🙂 ofcourse its a slow process.. the Indian govt way..

          I know you may consider this is as too much forward/positive thinking 🙂

          Reply
  3. Anonymous

    NPS v/s EPF : Some employers allow you to arrange your flexible benefit package in such as way that you can opt for NPS, the contribution will be shown from the employer and deduction is under 80CCD. In my case, the employer and I contribute to PF in the conventional way (12%), but on top of this the employer provides this arrangement in flexible benefit package to contribute to NPS from him under 80CCD. With this budget, I too will be able to contribute extra 50K to NPS and avail the 80CCD benefit. So overall, I am investing 1 lac, and since I am in the 30% bracket, I save 30000Rs (15000 among this from this year). So for me, it makes sense to invest in NPS (as long as I change my job to another employer who provides the same benefit).

    Reply
  4. Anonymous

    NPS v/s EPF : Some employers allow you to arrange your flexible benefit package in such as way that you can opt for NPS, the contribution will be shown from the employer and deduction is under 80CCD. In my case, the employer and I contribute to PF in the conventional way (12%), but on top of this the employer provides this arrangement in flexible benefit package to contribute to NPS from him under 80CCD. With this budget, I too will be able to contribute extra 50K to NPS and avail the 80CCD benefit. So overall, I am investing 1 lac, and since I am in the 30% bracket, I save 30000Rs (15000 among this from this year). So for me, it makes sense to invest in NPS (as long as I change my job to another employer who provides the same benefit).

    Reply
  5. R Parikh

    Isn't the Income tax act very clear that the aggregate of deductions under section 80C, 80CC 80 CCD (1) etc restricted to Rs 1.5 lakhs? Earlier the NPS was restricted to Rs 1 lakh (though the aggregate was made Rs 1.5 lakhs) & now entire Rs 1.5 lakhs can be through NPS (maybe due to the proposed change of giving options between EPF & NPS this has been made). Any further update & clarification clearing the confusion/ Kindly refer, thanks,

    Sincerely,

    R Parikh

    Reply
  6. R Parikh

    Isn't the Income tax act very clear that the aggregate of deductions under section 80C, 80CC 80 CCD (1) etc restricted to Rs 1.5 lakhs? Earlier the NPS was restricted to Rs 1 lakh (though the aggregate was made Rs 1.5 lakhs) & now entire Rs 1.5 lakhs can be through NPS (maybe due to the proposed change of giving options between EPF & NPS this has been made). Any further update & clarification clearing the confusion/ Kindly refer, thanks,

    Sincerely,

    R Parikh

    Reply
  7. R Parikh

    The section being talked about is 80CC(1B) for the additional 50000; isn't 80CC(1B) part of 80CC(1) & hence fall under aggregate limit of Rs 1.5 lakhs?

    Reply
  8. R Parikh

    The section being talked about is 80CC(1B) for the additional 50000; isn't 80CC(1B) part of 80CC(1) & hence fall under aggregate limit of Rs 1.5 lakhs?

    Reply
  9. sree

    Dear Pattu,
    Need your help with an NPS issue. I understand you are also investing in NPS. I am a State Govt employee coming under NPS, with the state govt putting in monthly matching contributions. So, in order to make use of Section 80 CCD(2), should we show those Govt contributions as part of our annual income? Because if we show those as part of annual income,there is practically no benefit from 80CCD(2). Kindly clarify as to how you manage this....thank you.

    Reply
    1. freefincal

      This is what I do. If X is the total combined annual subscription, I enter X/2 in 80CCD(1) and X/2 in 80CCD(2) in the ITR form. I receive the 80CCD(2) only as a reimbursement.

      Reply
  10. sree

    Dear Pattu,
    Need your help with an NPS issue. I understand you are also investing in NPS. I am a State Govt employee coming under NPS, with the state govt putting in monthly matching contributions. So, in order to make use of Section 80 CCD(2), should we show those Govt contributions as part of our annual income? Because if we show those as part of annual income,there is practically no benefit from 80CCD(2). Kindly clarify as to how you manage this....thank you.

    Reply
    1. freefincal

      This is what I do. If X is the total combined annual subscription, I enter X/2 in 80CCD(1) and X/2 in 80CCD(2) in the ITR form. I receive the 80CCD(2) only as a reimbursement.

      Reply
  11. Jitesh

    Mr. Pattabiraman, whats your thought on Chaitanya's comment. He seems having a valid point here. Though yes it is futuristic and too optimistic thinking, but when Govt's intention is to build NPS, they are quite likely to give it an EEE status. Isn't it?

    Reply
  12. Rick

    I am a PSU employee and is not under NPS. If I invest 50k in nps, that straight saves me 15k in taxes(30%tax). Now, after retirement even if NPS remains taxable till then, I will surely come under lower tax slab.
    So , isn't NPS a great retirement tool for people like us?
    please share your thought

    Reply

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