Do Not Invest Rs. 50,000 in NPS for additional tax saving benefit!

Idea concept featured image

Published: March 19, 2019 at 12:00 pm

Last Updated on May 2, 2024 at 9:50 am

Here is why you should not invest Rs. 50,000 to get additional tax saving in NPS under section 80CCD(1B) in 2019. 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 deduction under Section 80CCD(1) which is part of 80C. The employer’s contribution falls under 80CCD(2) and is separate from the 80C limit of Rs. 1.5 Lakhs.

This employer contribution is 10% of salary (Basic + DA) (14% for state and central government employees) and is deductible from taxable income up to 7.5 Lakh. Beyond this, it is taxable per slab. The same tax-free limit also applies to EPF.

In addition one can, after April 1st 2015, invest Rs. 50,000 in Tier of the NPS for deduction under Section 80CCD(1B)

So now the question is, should one open an NPS account to avail the additional 50,000 tax deduction? Suppose I  invest 50,000 a year in NPS for the next 15 years and get a return of 10%. I will get Rs. 15.88 Lakhs before taxes.. From April 1st 2019 onwards, the full 60% that can be withdrawn will be tax-free. See details here: NPS has EEE (tax-free) Status! Here is why you should still not invest. So now 60% of 15.88L is tax-free = 9.528 Lakh can got in hand.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The remaining 6.35 Lakh has to be annuitized. That is you need to buy a pension plan with it. Read this to understand how Annuity Plans Work.

Suppose my taxable income is 10,00,000.  I have managed to save Rs. 1,50,000 in say PPF+EPF+ELSS.

So my net taxable income now is Rs. 8,50,000

Case A: The total tax liability is Rs. 97,850. So I am left with Rs. 7,52,150 to manage investments, expenses, liabilities etc.

Suppose I invest Rs. 50,000 in NPS, the net taxable income is, Rs. 8,00,000.

Case B: The total tax liability is Rs. 87,550. So now I am left with 8,00,000-87,550 = 7,12,150 to manage investments, expenses, liabilities etc.

In Case A, I do not invest in NPS. So I am left with Rs. 39, 700 extra (50,000 minus tax).  I can invest this in an equity mutual fund for 15 Y at 10% return (conservatively). I will get Rs. 12.61L. This will reduce to 12.02 after tax.

In Case B, I invest in NPS. Meaning I do not have any extra sum left. My NPS investment for 15Y at 10% return will give me the same Rs. 15.88 Lakhs. However,  as mentioned above, only 9.5L will come to hand tax-free. About 6.35L will be used to buy an annuity.

Here we have assumed NPS (with 50% equity) will give the same return as equity mutual funds.  Don’t you think this is a bad assumption? Don’t you think you can get better returns in equity mutual funds than NPS?

That 40% tax-free corpus in NPS means little as one will have to buy an annuity to get a pension which will be taxed as per slab. Remaining part of the corpus will be taxed per slab.

Do not complicate your portfolio by investing in NPS for tax-saving. NPS is like a frigid ULIP. You will lose all liquidity. If you exit before 60, 80% of the money will be locked in an annuity. After 60, minimum 40% is the annuity requirement.

Best reason to avoid NPS: Suppose you wish to quit one year before age 60, then you will lose 80% of your corpus to annuity. Only 20% will be tax free in hand. Whereas with mutual funds, you have entire corpus at your disposal at all time!

Changing AMCs or asset allocation is a pain. Fund management is an unknown commodity here. Soon the AUM of NPS will beat all equity mutual funds. This might severely impact returns.

Pay the tax now and choose equity mutual funds. With luck, you will be able to beat NPS hands down with full freedom to wield the corpus any which way you want.

Do not invest in a bad product to save tax. Do Not Invest Rs. 50,000 in NPS for additional tax saving benefit under section 80CCD(1B)

Need more convincing? Try this: National Pension System (NPS): Exit and Withdrawal Rules

Credits: I thank Krishnan Muthusubramanian and CA Karan Batra who runs for valuable insights.

Update 4: NPS Tier 1 Equity Scheme (E) Performance – Oct 2016

Update 3: A Guide to investing in the National Pension System (NPS)

Update 2:  NPS: Partial Withdrawal Rules 2016 are just awful! Beware.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)