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.

The maximum value under 80CCD(2) is computed as follows.

Let A = amount contributed by employer in a financial year.

Let B = 10% of income from salary

Let C = Gross Total Income

(2) Then the maximum value permissible under 80CCD(2) is the smallest among A,B and C.

(3)  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 a 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.

The trouble with NPS is that the entire sum will be taxed. Not just the gains. If I am in 20% slab, the post-tax maturity value is Rs. 12.61 Lakhs.

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.

Update 1: Budget 2016: National Pension Scheme – 40% of withdrawal made tax free! Only 40% of corpus at the time of retirement is tax-free. Therefore, 40% of 15.88L will be tax free. That is, 6.35L will be tax-free.

Out of the remaining 9.53 L, as per current rules 40% has to be annuitzed (require explicit communication for this). Therefore 3.8L has to be used to purchase an annuity. Read this to understand how Annuity Plans Work.

About 5.7L will be left. If this amount is not used to buy an annuity, one will have to pay tax as per slab.

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 a equity mutual fund for 15 Y at 10% return (conservatively). I will get Rs. 12.61L. 

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 be the same Rs. 15.88 Lakhs. However,  as mentioned above, only 6.3L will come to hand tax-free. About 5.7L will be taxed per slab and rest 3.8L 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?

As long as rate of return from NPS and equity mutual fund are same, it does not matter whether I defer my tax liability by investing in NPS or pay tax now and invest the rest in equity mutual funds.

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.

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 severly 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 in National Pension Scheme For Saving Tax!

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

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122 thoughts on “Do Not Invest Rs. 50,000 in NPS For Saving Tax!

  1. Prakasam

    I'm a Central Govt. employee ans NPS contribution(only employee) for next financial year will Rs. 75K. I want to know wheather I can save extra 125K or 75K for 80C in next financial year?. I have this doubt because of extra 50K NPS tax saving. I want to know to preplan my sip in ELSS for next year.

    Reply
  2. Prakasam

    I'm a Central Govt. employee ans NPS contribution(only employee) for next financial year will Rs. 75K. I want to know wheather I can save extra 125K or 75K for 80C in next financial year?. I have this doubt because of extra 50K NPS tax saving. I want to know to preplan my sip in ELSS for next year.

    Reply
  3. Amit Phatak

    I would like to highlight some aspects of NPS. I'm not necessarily endorsing it. Many central employees have been compulsorily enrolled in NPS since 2004. Do you think they'll want to pay tax when they retire at 60? I'm sure NPS would be made EEE (on par with EPF, PPF) eventually. Also I don't think you can compare NPS with a ULIP. 50% equity is only through index funds (even then you can switch fund managers if you want). You could say - don't invest in NPS "just" to save tax. It can be one basket where you keep some of your eggs.

    Reply
  4. Amit Phatak

    I would like to highlight some aspects of NPS. I'm not necessarily endorsing it. Many central employees have been compulsorily enrolled in NPS since 2004. Do you think they'll want to pay tax when they retire at 60? I'm sure NPS would be made EEE (on par with EPF, PPF) eventually. Also I don't think you can compare NPS with a ULIP. 50% equity is only through index funds (even then you can switch fund managers if you want). You could say - don't invest in NPS "just" to save tax. It can be one basket where you keep some of your eggs.

    Reply
  5. Pattabiraman Murari

    I am central govt employee too. As of now they will have to pay tax. Who knows what will happen in future. NPS works like a ULIP. You will have send requests to change asset allocation or fund managers. It can be one in the basket if someone else put it there. There is no need to voluntarily buy a bad product.

    Reply
    1. Dhirubhai

      What if one does not want to get out of NPS ? If one has other savings that take care of all expenses, but want to use this as a low cost tax efficient way of conserving wealth for the next generation(s) or until they are 70 through allocation to debt or equity as they see fit.

      Of course, equity funds would give better returns for the long term for anyone reading these comments here. But for that narrow purpose for that even narrower class of ppl want a "compulsory" way of saving who are okay with less returns till they are 70 or dead; it may fit their purpose.

      Reply
      1. Dhirubhai

        I was just trying to invert the problem and find out which is the case that NPS can provide returns that do not suffer due to annuity and tax issues.
        Of course, you will get the tax hit when you turn 70. But if you are dead by then, survivor will not have to pay taxes. Pretty grim in any case.

        Reply
        1. Anjan

          There is no way out of paying taxes with NPS. The government wants to fool us by saying we won't be taxed if we go for 60% annuity but of course we know even annuity income is taxable. So its basically just deferring your taxes to a later date.

          NPS must be made EEE to make it a viable retirement product. We pay taxes all our earning life directly/indirectly, the least the government can do is make our retirement life a bit easier.

          Reply
      2. Anjan

        Well one way of looking at it is that NPS forces you to save for retirement. Many a times when we have liquid money available such as in Mutual Funds, we tend to go for early redemption under family pressure or peer pressure due to circumstances even when we ourselves do not want to do so. You know how emotional blackmail & guilt trip works in India.

        By investing in NPS and having no option to withdraw, essentially forces you to forget about this money and find other ways to make do. Only problem is that retirement age is set at 60 and I don't think everyone in current generation wants to retire that late. So that is something the government can make flexible. Give people the option to declare early retirement and claim the full corpus.

        Reply
  6. Pattabiraman Murari

    I am central govt employee too. As of now they will have to pay tax. Who knows what will happen in future. NPS works like a ULIP. You will have send requests to change asset allocation or fund managers. It can be one in the basket if someone else put it there. There is no need to voluntarily buy a bad product.

    Reply
    1. Dhirubhai

      What if one does not want to get out of NPS ? If one has other savings that take care of all expenses, but want to use this as a low cost tax efficient way of conserving wealth for the next generation(s) or until they are 70 through allocation to debt or equity as they see fit.

      Of course, equity funds would give better returns for the long term for anyone reading these comments here. But for that narrow purpose for that even narrower class of ppl want a "compulsory" way of saving who are okay with less returns till they are 70 or dead; it may fit their purpose.

      Reply
      1. Dhirubhai

        I was just trying to invert the problem and find out which is the case that NPS can provide returns that do not suffer due to annuity and tax issues.
        Of course, you will get the tax hit when you turn 70. But if you are dead by then, survivor will not have to pay taxes. Pretty grim in any case.

        Reply
  7. Anonymous

    I have a doubt. If gross salary is 500000.00. I take 200000 and employer pays say 50000.00. Now my deduction will be 250000.00 ?? The salary slip will show gross salary as 500000 and deductions as 250000.00 .
    I am not clear about the deduction from gross income of employerr's contribution

    Will be grateful if you can clarity

    Reply
  8. Anonymous

    I have a doubt. If gross salary is 500000.00. I take 200000 and employer pays say 50000.00. Now my deduction will be 250000.00 ?? The salary slip will show gross salary as 500000 and deductions as 250000.00 .
    I am not clear about the deduction from gross income of employerr's contribution

    Will be grateful if you can clarity

    Reply
  9. Ram

    Good Article. Will surely think more before investing in NPS. I have a doubt. Point 3 of your article talks about tax saving under 80 CCD(1B) for additional investment of 50K in NPS. I want to know which tier of NPS will be applicable for this investment? Tier 1 or Tier 2 or both?

    Reply
  10. Ram

    Good Article. Will surely think more before investing in NPS. I have a doubt. Point 3 of your article talks about tax saving under 80 CCD(1B) for additional investment of 50K in NPS. I want to know which tier of NPS will be applicable for this investment? Tier 1 or Tier 2 or both?

    Reply
  11. Saroj Sharma

    It might be incorrect to calculate NPS amount as Rs. 12.61 Lakhs after tax deduction from total amount of Rs. 15.88 Lakhs. 2 points can make difference:
    1. after 60 yrs, only 40% amount can be withdrawn in lumpsum, and rest would be annuity. so 1 time tax would be only on 40% amount and not on complete amount (Rs 15.88L).
    2. after 60 yrs, our primary income (salary) would not be there, and so this complete withdrawal would not be taxed at 20%. there would be impact of standard deduction and the tax slabs (10% till 5Lac, 5-8 lac at 20% etc). This would make deferred tax lower compared to paying tax now.

    Reply
  12. Saroj Sharma

    It might be incorrect to calculate NPS amount as Rs. 12.61 Lakhs after tax deduction from total amount of Rs. 15.88 Lakhs. 2 points can make difference:
    1. after 60 yrs, only 40% amount can be withdrawn in lumpsum, and rest would be annuity. so 1 time tax would be only on 40% amount and not on complete amount (Rs 15.88L).
    2. after 60 yrs, our primary income (salary) would not be there, and so this complete withdrawal would not be taxed at 20%. there would be impact of standard deduction and the tax slabs (10% till 5Lac, 5-8 lac at 20% etc). This would make deferred tax lower compared to paying tax now.

    Reply
    1. Trilok

      Totally In Agreement Saroj on this....I assume this point has been missed out completely as part of this analysis....

      Reply
  13. Chandra

    Recently i have enrolled in NPS. Knowing the fact that Equity Mutual Funds beat NPS i had to go because i wanted to take benefit of Employer's Contribution.

    Besides that i only contributed minimum amount so that i can divert other part to ELSS 🙂

    Thank you for time!!!!

    Reply
  14. Chandra

    Recently i have enrolled in NPS. Knowing the fact that Equity Mutual Funds beat NPS i had to go because i wanted to take benefit of Employer's Contribution.

    Besides that i only contributed minimum amount so that i can divert other part to ELSS 🙂

    Thank you for time!!!!

    Reply
  15. Seetha Raman

    Only gain will be subject to tax at the time of retirement.
    Second as already pointed out 60 PCT of such gain only taxable
    Also you can defer this withdrawals till 70

    Reply
  16. Pattabiraman Murari

    I am aware of this. I choose not to factor in the annuity. That would only make the case for NPS even worse!
    This is treated as income and will be taxed per slab as of now. Where does standard deduction figure in this?
    The bottom line is, it is so much easier to beat NPS returns. NPS corpus will the largest which will impact returns.

    Reply
  17. Investor134

    I believe this is one aspect missing in this analysis.
    Say I am in the 30% bracket.
    I opt to invest 50K in the NPS scheme.
    Due to this, I will save 15K in tax. I can invest this 15K in any other equity scheme or MF or FD...
    So the total principal of investment is 65K (50 in NPS + 15 in equity).

    Now, if I do not opt to save the 50K in NPS scheme, I pay 15K tax on that amount, and get only 35K today. Which I can invest in equity/MF/FD...

    So are we saying, it is still beneficial to invest 35K annually in equity/MF/FD etc... instead of investing 65K annually in NPS plus other options.
    If yes, by what % will the returns of other options have to be higher than NPS?

    Reply
  18. Ravish

    Even I have same query as posted by Investor134 above, by investing in NPS Tier 1 account, I can directly save 30% (assuming he/she is in 30% bracket). That gives a head way saving of 15,000/- into the hands of the investor. I think the tax saved with this investment makes up for the tax laid later on at the time of pension in the hands of the investor (retirement age).

    Reply
  19. Pradeep

    Strictly for asset Allocation perspective, let us assume that one saves 65% in Equity and 35% in Debt. part of this debt is in EPF/PPF/NPS, then the Debt return grow tax free. assuming 1.5 L in each EPF/PPF and NPS per year the NPS amount can be used to buy Annuity ( full 100% , instead of 40 % minimum). if We buy 100% annuity then the we do not pay any tax at withdrawal. If this is a amount under 10% of you total retirement corpus, then would it add diversity to your income stream? or is it not worth doing this at all and we go all out equity except EPF/PPF?

    Reply
      1. Dhirubhai

        I am not Pattu the Great 🙂 but I will still persist to answer this.

        An annuity gives you atleast 1.5-3% less than a regular FD else its just not worthwhile for an insurance company to offer it. While you might get about 1.5% higher yield over many years in NPS compared to EPFO (quite likely!), the annuity would kill most of the outperformance during the withdrawal part.

        The problem is that since you read FreeFinCal, you will invest intelligently and get a higher return than an annuity. You would invest the funds better through an FD or debt fund and withdraw slowly lowering your tax by ensuring that your draw-down or withdrawal is in the lowest tax bracket possible.
        Just check any annuity available today...do the calculations. A 1.5% outperformance would be killed by a 2% underperformance for the next 10 years.

        Reply
      1. Pradeep

        Thank You so Much. I will discontinue investing in NPS and Keep it to the bare minimum of 5000 Rs/Year since I am already into It 🙁 and would not want to let the account go dormant. Maybe that is an option too but do not know about the implication.

        Reply
  20. Vijay Mudaliar

    Have gone through the entire article, but i have some points that may warrant a second thought in contemplating investment in NPS:
    - One of your assumption is the returns on equities from mutual fund and NPS will be same, hence with an assumption of 50% invested in equities there is a straight away increase in returns of atleast 1% p.a.. This is the difference in effective AMC that will be charged lower in NPS (including certain fixed costs) compared to AMC of a mutual fund (including debt and equity).
    - Second most important point being unlike in mutual fund wherein no investors increase their contribution in line with inflation the contribution of NPS especially govt. employees will increase in-line with salary increase. This in a way increases the funds under management and hence allowing NPS managers to manage the cost within the lowest AMC they are charging now
    - Thirdly, this will be kind of compulsory savings which in 90% of cases in mutual fund SIP, investors have stopped contributing after a period of 15-18 months. Thus NPS will inculcate forced savings
    - Fourthly, we should assume that all investors will invest 60% of their corpus from MF in buying an annuity given India's social security benefit.

    Hence there are enough reasons for one to consider NPS investment. Any other views are welcome.

    Reply
    1. Madhu

      Re: 3rd point above.

      Considering that people reading this blog are self-motivated to pursue meaningful investing to save for future, they can also be assumed to be disciplined enough to continue to contribute to SIP all the time not just for 2-3 years. Effectively, for the cohort seen here, it is not necessary to 'force savings' upon them.

      But the same can't be said of others who don't understand the important of saving for future and less financially educated.

      Reply
  21. Arun

    Hi, I had a different question. Is this additional contribution under section 80CCD(1B) for self contibution? Can I claim this extra after opening an NPS account myself and contributing Rs. 50000. The reason I ask is its investment declaration time in my office and this section is tied to salary contribution to NPS (ie you salary need to first contribute 150k and then 50k more, ie total contribution to NPS should be 200K (?))

    Reply
  22. George Matt

    Hi, what about individuals traced at the highest bracket? Wouldn't it be beneficial for them as roughly only 30000 would be left for them post tax.. Please correct me if I am wrong.

    Reply
  23. Karthik

    As someone has already said, there is a chance that NPS could be made EEE from tax eventually.
    Also, who knows whether the long term capital gains are tax free after few decades?

    Reply
  24. senthil

    i am a central govt. employee. can i show my compulsory deduction of 10% (80k) by splitting 50k in 80ccd1b and remaining 30k in 80c

    Reply
  25. J. R. Pinto

    26-May-2015

    Dear Sir,

    Read your article dated 05-Mar.-2015 on NPS on http://www.freefincial.com titled "Do Not Invest Rs. 50,000 in NPS For Saving Tax!" along with the update by Shri Krishnan Muthusubrmanian.

    The uncertainty on withdrawals beyond the amount used for the annuity purchase is certainly a dampener.

    As pointed out by someone, it would not come as a surprise if the entire withdrawal from the NPS corpus in a particular year be treated as income for that year.

    Since the earliest, fresh-out-of-school members of the NPS in the government sector would not retire before around 2062, it's a long way off before first-hand treatment on withdrawals is known.

    Ofcourse, unorganized-sector NPS contributors who joined the scheme post-2009 at midlife or so will get to know of the the tax treatment earlier but may be so few in number that their cries for justice and clarity may barely be heard, let alone heeded.

    In ending, may I request you for your view on admissibility of tax, if the entire retirement corpus is used to purchase the annuity?

    Secondly, for FY 2015-16, if ₹1,50,000 is invested in 80C-exempt instruments like EPF, PPF, etc., and ₹50,000 is invested in NPS-Tier I (directly without the involvement of the employer), would the taxable income be reduced by ₹2,00,000?

    Your views, please?

    Reply
  26. Kishore

    Yes i have the same question, I am contributing 1.5L under 80C for EPF, PPF, LIC,..etc Now if i contribute only 50K for NPS, will that amount be tax free ?
    or
    Do i have to invest 1.5L only in NPS and then the extra 50K saved in NPS will be treated as tax free?

    Kindly clarify.

    Reply
  27. sanjay kumar srivastava

    Dear Madam/Sir,
    I made a premature exit from NPS of late (in the Financial Year 2014-15).
    Please tell me how to calculate capital gain tax on the 20% of the accumulated wealth of Tier- I account and on the entire wealth of Tier- II account that I have received, or from where to get a capital gain statement (The NPS team is not providing me with a capital Gain Statement)
    Needless to add, I’ll be very thankful to you for granting my request.
    I look forward to your taking up my problem at your earliest convenience.
    Thanking you, in anticipation.
    Sincerely, yours
    Sanjay Kumar Srivastava

    Reply
  28. Arun

    Hi,

    I was trying to do similar computation for on my own situation and this is what I have.

    Variables considered
    1. Equity ROI 12%
    2. Debt ROI 8%
    3. NPS equity contribution maxed out at 50%
    4. Years to retirement 24
    5. I have an investible surplus of 50,000 and have already maxed out other deductions like 80c etc
    6. I am in the 30% tax bracket

    Option 1. I invest 50,000 in NPS. If I do so, I save 30.9% of 50,000 in taxes and I invest that savings also in an equity MF. With this the corpus becomes (NPS_EQ+NPS_DB+MF_EQ) = (29,53,881+16,69,119+18,25,498) = 64,48,498

    Option 2. I invest 50,000 in MF. Here the corpus would be 59,07,762.

    Now in terms of absolute value of the corpus, option 1 is better. But the goctha is taxation on 60% of the lumpsum withdrawal and mandatory annuities for 40% of corpus in NPS. If you spread out the lumpsum withdrawal over 10 years, taxation could be minimized (may be even zero).

    So while investing in NPS may not be great, but it may not as bad as being projected. I feel it may be even worth the risk if you want to bet that NPS MAY have better tax incentives in future(like EEE as was proposed in the now defuct DTC, consessional tax rates, indexation benefits etc) and/or there would be better annuity options (say inflation indexed) in future as the financial markets mature.

    Thanks,
    Arun

    Reply
    1. freefincal

      Good luck with your bet and let NPS control when you retire: 80% to be annuitized for exit before age 60 and 40% afterward. Lock-up your money in an index fund and the lock up 40% of it for life. Yes you are right, it is not as bad as being projected. It is actually worse!

      Reply
  29. Narendra

    I have made some calculations to compare NPS with Mutual Fund investment.
    I have used some online calculator to calculate the returns.
    I have made some assumptions and they are mentioned below.
    Also, remember that, stock market is volatile and doesn’t give guaranteed returns.
    Historical data shows that, over a long term (10+ years), stock market has given over 20% returns.
    So, I am assuming that, in future also we will get same kind of returns.

    Investment amount: Rs.5000 per month
    Number of years: 15
    So, total amount invested is Rs.9,00,000

    Returns from NPS:
    NPS has given 11% returns (based on historic data – assuming 50% in equity).
    So, the amount at the end of 15 years is: Rs. 22,94,287.
    Of this, 60% can be withdrawn – so that will be Rs. 13,76,572.
    After deducting 20% tax, the money remaining will be: Rs. 11,01,257.
    Remaining 40% will goto annuity towards pension.
    Assume that, the pension is taken for next 15 years.
    Assume that, the interest rate given is 7% (in reality, it will be lesser than this).
    So, Pension will be: Rs. 5,500.
    Over a period of 15 years, the pension received is: Rs.9,90,000
    Tax deduction advantage in Income Tax for 15 years: 20,000 X 15 = Rs.3,00,000
    So, total amount received (60% lump sum after deducting tax + Pension + tax deductions over 15 years)
    = Rs. 11,01,257 + Rs.9,90,000 + Rs.3,00,000 = Rs. 23,91,257

    Returns from MF:
    MF Scheme selected: HDFC Top 200.
    It has given 19% returns per annum over a long period of time.
    So, assuming that, it will give similar returns in the future.
    Returns at the end of 15 years: Rs. 51,02,500.
    This amount is completely tax free.
    And now, invest this in an FD and calculate the returns over next 15 years.
    Assuming 8% interest rate and assuming that you will take out the interest every month, you will get Rs.34,000 as monthly income.
    So, if we add this over a period of 15 years, the total return becomes:
    Rs. 51,02,500 + Rs. 61,20,000 = Rs. 1,12,22,500.

    So, my calculation very clearly shows that, Mutual Fund investments are far better than putting money in NPS. Though MFs are risky, they are liquid - you can take out your amount any day and invest elsewhere. Even NPS is risky and also it is taxed!

    I have not considered tax deductions for Mutual Fund investment, since HDFC Top 200 does not come under ELSS.
    If you invest in a fund which comes under ELSS, then you will also get tax deductions.
    Since I consider HDFC Top 200 as one of the best (evergreen) funds, I have considered it for this calculations.

    There could be mistakes in my calculations. So, please let me know, if you find any.

    Reply
  30. Jitendra Kumar, MBA,CFP,CAIIB

    Hi,

    Going by my experience, where my Wife is working with PSB, contributing to NPS, seeing the result , i don't take few of your arguments, reason listed below:
    1. Returns in NPS is higher then 50% allocation in equity,because NPS only cap your contribution at 50 % in equity, and dont do re-balancing . During higher market return after few year, corpus can be highly skewed to Equity as high as 90 % (in my wife scenario, it was around 16% overall and not just equity portion return)
    2. Expense ratio in NPS (less then 1 %) is much lower then Mutual funds (2-3 %), which in long term will make huge difference on big corpus.
    3. You long term retirement wealth is best suited to kept in Long term product like PF, PPF or NPS, read mental accounting, advantage less chances that u will use this for son's education or purchase of property then MF.
    4. No Liquidity Pressure for Fund manager as it is aligned for Long term, so will not have same redemption pressure like MF. One would be at huge risk during recessionary periods, where MF Fund manager has to meet redemption pressure and liquidate stocks at the worst time.
    5. Someone has already pointed it's a new product and govt trying to promote this, hence we can rest-assured after some review government will not let it keep tax dis-advantage then PF/ELSS.

    Reply
    1. freefincal

      1. If NPS does not do rebalancing then it is all the more reason to avoid it! When the next big crash occurs the effect will be felt.
      2. NPS is a passive mutual fund. Therefore expense ratio HAS to lower. It will not beat the market either.
      3. Mental accounting is a personal concept. A product cannot be praised because investors make mistakes! There are huge downsides of lock-in.
      4. Not too worried about it personally.
      5. It was launched 12 years ago!!!

      Reply
  31. Kumar

    I'm a salaried employee and in 30% bracket. As suggested by someone in the post earlier, I had key-in 1.5L under 80C (PF+PPF+Insurance Premium) and 50K under 80CCD (employee) contribution in 2015 ITR1 form and was surprised to see only 1.5L was considered instead of 2L!!

    for testing, I changed 80C contribution to 1L and retained 80CCD to 50K, then the I could see 1.5L as deduction.

    so, are we really getting the extra benefit for 50K in investing NPS???

    Reply
    1. freefincal

      When you filed in 2015,this benefit was not in force. It will come into play only when you file in 2016.

      Reply
  32. Rohit

    I do some calculation for NPS..Say I am in 20% tax bracket and by basic salary is 40K
    If I invest 10% in Tier 1 that will save me around 800 monthly.
    This 800(Tax saving) will go to NPS account + my own contribution 3200(From Pocket)
    @NPS Investment: at the end of 25 year I will get @ 9% :- 4591625 for 4000 monthly investment (3200+800)
    @MF Investment: Let say if I invest the same amount I:e 3200 in MF without saving Tax I will get 3703968.
    I am assuming rate of return for both investment is same. then I will get extra 887657 ( 4591625 - 3703968)
    Benifits of NPS over MF
    1) If govt remove the Tax implication on withdrawl amount as same as ELSS I will get 887657 extra then MF.
    2) I don;t think so anyone can continues his investment in MF as long as 25 year untill restrication can't be put ( only 3 year restriction in MF)
    3) you still have the option to save more tax on 50K in Tier-2 account
    Suggestions welcome 🙂

    Reply
    1. freefincal

      1) If govt remove the Tax implication on withdrawl amount as same as ELSS I will get 887657 extra then MF. ==> IF
      2) I don;t think so anyone can continues his investment in MF as long as 25 year until restriction can't be put ( only 3 year restriction in MF) ==> Sorry, do not understand what you are saying.

      3) you still have the option to save more tax on 50K in Tier-2 account ==> Tier 2 cannot be used for tax saving.

      Reply
  33. Vaibhav

    Hi Krishnan/Karan
    Just need an advice from you. As within this year end or beginning next year planning to leave India permanently .So if I invest 50K this year and save tax .And in April 2017 quit from the NPS keeping my net corplus less than 1 Lakh .Can I withdraw the entire amount and don't have to buy annuity. Then does it make one of the best investment for me to invest in NPS?

    Reply
    1. freefincal

      "Can I withdraw the entire amount and don't have to buy annuity?" How I wish I could do this too! Unfortunately not possible.

      Reply
  34. Rad

    In Case B, the person will save the tax amount (say 15k) and if that is also invested, wont he then get double benefit. He can invest in NPS to save tax and then invest the tax saved in equity plans. Why is that not factored in the calculations.

    Reply
    1. freefincal

      It is not factored in because there is no tax-saving in NPS! The tax you save now will have to paid when you withdraw. Which is why cases A and B give the same corpus.

      Reply
      1. Rad

        Thanks for the reply.

        But, since we don't know the tax slabs or rates which will be applicable 25-30 years from now, there is no clarity on what tax a person will have to pay during NPS withdrawal. Most probably, the person will fall in a lower tax bracket at that time and so taxes would most probably be lesser (slab wise, not in absolute terms). Moreover, the 15k which the person can save today can be invested or utilized better which wont be possible in case of paying the tax and investing in equity plans.

        Reply
  35. Vinod

    Hi Krishnan,
    I work in a state govt dept...
    for NPS, 10% of amount is deducted from my salary.. and i have around 65k annual investment in NPS due to this 10% deduction, also in 80c and other investment comes to around 1.20lac.
    total NPS+80C Total amount would be 1.75lac
    my doubt is, can i include this excess 25k in 80CCD(1B) and claim income tax benefit. As of now we are allowed only 1.5lac as saving.

    Reply
  36. Sunil

    Sir my basic salary is Rs 20000/ month and DA is nil. I have invested Rs 50000/ in NPS tire 1. Will I get tax exemption under section 80 ccd 1B on 50000/ or not?

    Reply
  37. Jyoti Prakash Mishra

    Hi,

    Thanks for the detailed analysis.
    However, there is another assumption that has been missed - that the annual taxable income, and hence the slab rates, will be the same in the year of saving and the year of harvesting returns.

    It may sound a little far fetched but you would ideally liquidate NPS either post-retirement or in a year where you run dry of finances. In both these cases, you will be at a lower slab rate.

    Hence, you may add 10% returns from NPS to another 10% (or 20%) to the tax that you save on NPS, if you migrate to a lower tax slab in the year of return than the year of saving.

    Am I missing something ?

    Reply
  38. mukul

    The only risk in the above scenarios might be the reversing of the taxation rules

    TAX even the equity
    Remove tax from NPS since govt is unable to offer social security

    Thirdly you will be taxed according to the tax slab at that time
    IF you opt to take regular pension (under different combination) - you may optimize on the tax payments

    Reply
  39. vishal

    MY ANNUAL GROSS SALARY IS RS. 650000/-. MY CONTRIBUTION IN EPF IS RS.65000/-, MY ANNUAL CONTRIBUTION IN NPS IS RS.50000/-, CONTRIBUTION IN NPS BY EMPLOYER IS RS. 50000/-, CONTRIBUTION IN ELSS IS RS.35000/-.SO,MY INVESTMENT UNDER 80C IS RS.100000/- & RS.50000/- IN NPS. NOW WEATHER I SHOULD INVEST RS.50000/-IN NPS(ADDITIONAL PURCHASE) OR OTHER OPTION AS PPF ETC. TO GET RELAXATION UPTO RS.200000/- UNDER 80C DURING F.Y.2015-16.

    Reply
    1. freefincal

      " WEATHER I SHOULD INVEST RS.50000/-IN NPS(ADDITIONAL PURCHASE) OR OTHER OPTION AS PPF ETC. TO GET RELAXATION UPTO RS.200000/- UNDER 80C DURING F.Y.2015-16."
      Either way is fine.

      Reply
  40. AMAN SHIV SHARMA

    " WEATHER I SHOULD INVEST RS.50000/-IN NPS(ADDITIONAL PURCHASE) OR OTHER OPTION AS NSC ETC. TO GET RELAXATION UPTO RS.200000/- UNDER 80C DURING F.Y.2015-16."

    Reply
  41. Lokesh

    Hi,
    I am 28 year old, private employee. I m not sure why NPS is not a good investment for pension plan (Don't treat pension plan as FD or other mutual fund). If you can stick with NPS for pension, will be right for you.
    NPS allow you to invest/save over 1.50Lakh, no other investment can (ELSS+PPF+EPF)can fullfil, so u can avail the tax benefit up to 2.0 Lakh.

    I m not sure why people are trying to show tax as nightmare. Let me here to try to show something to you.
    Age 28 Year
    Retirement 60 Yr (As like with investment, stick)
    Total Investing Period 33 Year
    Monthly Investment 5000
    Return 10% only

    _________________________
    Invested = 1980000
    Interest = 13291081
    Tax saved = 594000 (U are not calculating this, as NPS saved for you 18000/yr)
    Pension wealth = 15271081
    You can withdraw 60% of total maturity.
    Lumpsum = 9162649
    Monthly pension = 40772 (As depend on anuity return, but as thumb rule in investment go with debt option according to your age) So in 60, you won't take risk.

    So 40772*12 = 489264 (Tax = 17434 ) -> In today sceneario, what do you think in 2049 the tax slab would b same, you won't come under tax slab.

    So only for tax savings, NPS is good and best.
    Thanks.

    Reply
  42. Ilesh

    I am cover under old pension scheme, as i joined state govt job before 2004. Can I open account under National Pension Scheme as Individual and avail tax benefit of rs. 50,000 under 80CCD (1B).

    Reply
  43. karthik

    I must reluctantly agree with your assessment.
    However, I believe that one day or the other I will go for an annuity based pension plan. When I retire at 60 ( current age 30) , I will be sucked into some or the other pension plan for a monthly payout. Dont you think its better to have one pension plan in hand from now on, by taking advantage of the tax break?

    In your calculation, you make the assumption that the investor will try to cash out on retirement. This will NOT be the common scenario in my opinion. By retirement , I should have completed my loans, completed childrens education/marriage and expect to recieve a good payout from PPF/PF. This will anyway end up in some annuity based pension plan which will be shoved down my old throat by some street smart finance wizard.

    So, what if the tax break is an added excuse to plan for retirement?

    Reply
      1. karthik

        I suppose inflation sucks.. I will end up getting ~30k an year which will perhaps pay for either my food or medication.

        I have decided to drop my idea of investing in NPS right now at 30. I was convinced with the argument that having liquid assets is more important rather than locking up the capital for 30 years.

        Regards,
        Karthik

        Reply
  44. Amol

    14.5% service tax being charged while making online additional investment in NPS. is it worth paying 14.5% service tax if I am in 20% bracket and my total taxable income aggregating to 540000 ?

    Reply
  45. srimohan

    Sir, I already have more than 1.50 lacs under 80c. I have invested nps 50k (no employee part) tier-I. which column I have to show for 50k. If I shows in ITR-1 5(C) 80 CCD (Employees / Self Employed Contribution) total deductions not reached to 2lacs, 5(d) 80 CCD (Employers Contribution) then it reached to 2lacs. thanks sir.

    Reply
  46. Mukesh Kumar

    I HAVE INVESTED Rs.55500.00 in LIC and Rs.82500.00 in PPF, Deduction in NPS from Salary is Rs. 42000.00 and Total (55500+82500+42000) =180000. Can I show Remaining 30000.00 under sec. 80ccd(1B)

    Reply
  47. Brijesh

    NPS tier 1 or tier 2 which one gives extra tax benefits..i means i would invest only in the tier which gives extra tax benefits not under 80 benefits...

    Reply
  48. roshan

    Once you join NPS, you are forced to contribute. If not, Your account will get frozen after 1 year. Need to pay huge fine to reactivate each year. Bank fixed deposit is better option to save tax, at least one should not wait 60 years.

    Reply
  49. Rajul Anand

    Equity MF beats NPS hands down. Best part, you can reinvest any gains in MF to any other product unlike NPS that force you to buy inferior Annuity (which I read is even worse than FD in terms of interest rates offered). Also, the MF's house are paid double when they invest your money through NPS. First, small commission from NPS and second commission when they put money in their own AMC fund(and some of the funds charge 2% as annual expense). Although, it applies to MF but here you can choose which fund you want to pay that 2%. There, the decision lies in hand of the manager handling your NPS.

    Reply
  50. TBB

    I agree with you sir, not for tax saving but it is indeed a help for self saving against spending unwillingly. And it is not mandatory to invest all your savings in NPS. Just few eggs to hatch later.

    Reply
  51. SJJ

    Sir, I have already invested 1.5 L through Loan principal payment in section 80C, my employer TCS has option to deduct from my CTC towards NPS contrinution. In that case if I allow ~4000 Rs per month, i.e. 50000 per year, will that 50000 be automatically considered before deducting tax from my monthly salary as total 2,00,000 exemption? or I would have to declare it to taxman?

    Reply
    1. freefincal

      That will depend on how your employer does the form 16. If they dont take that into account, you can always declare in ITR and get a reimbursement

      Reply
  52. Pingback: How to make online contributions to NPS Tier I and Tier II accounts

  53. Sriram

    Dear Readers,

    NPS is a product to be seen differently (beyond an investment opportunity). The objective of this is to enable pension for life. The simple way to see the return is as follows

    Basic + DA (A) - 6,00,000
    A. NPS Employer Contribution (10% of Basic + DA) 60,000

    B. Additional Contribution 50,000

    Total Contribution INR 110,000 (A+B)

    TS1 - Employer Contribution excluded from your Taxable Salary hence 1st Level savings on employer Contribution (30% of A) 18,000

    TS2 - 30% of additional contribution - 15000

    Total Tax Savings (TS1+TS2) = 33,000
    Net Outflow towards NPS 77,000
    Net Outflow for 15 Years (77,000 x 15) = 11,55,000
    Maturity on NPS (8% of 1,10,000) @ 15 yrs = 31,78,000

    Option 1 (if no lumpsum withdrawn)
    Pension @ 7% interest = 18,431 (Though taxable, with assumption no additional income post retirement , hence no tax levied)

    Option 2 (if 60% withdrawn)
    20% of corpus (635,600) taxable @ 20% slab = 51,000 (approx with 20% variation)

    Hence...
    Additional Tax paid for 15 Yrs without NPS = 765,000
    Tax to be Paid @ the 15th Year (only if Option 2 selected) = 51,000 (approx with 20% variation)

    Please feel free to correct my workings if found wrong

    Reply
  54. Manish Ochani

    Hi,its a nice & informative article.

    Can I invest in NPS as debt portion of my portfolio.?
    An portfolio should contain mix of equity+ debt.I am already investing in MFs thru SIPs(10k p.m.) , for debt portion I was investing in PPF but now I am thinking of investing in NPS instead of ppf which would give me addl. tax break as well as higher return than ppf ( but with higher lockin)I fall in 20% bracket & 35 yrs old.

    Pls suggest

    Reply
    1. freefincal

      I don't know about higher returns. If you are comfortable with the crappy withdrawal rules, then I guess, yes.

      Reply
  55. raj

    Sir, i AM RAJASTHAN GOVT EMPLOYEE HAVING NPS- SG. My NPS contribution is Rs 43000 and Rs 43000 is employer contrib. Now as per ITR AND SALARY SLIP, the employer contrib is shown as Tax exempt under 80 CCD-2 but simultaneously Rs 43000/- is also shown as income in my salary. Then what is the benefit of 80-CCD2. PL. EXPLAIN.

    Reply
  56. Sriram

    Ideally should not be shown as taxable income, in my case and all of my friend's this (employer contribution) is not shown under taxable income. you might have to check internally with your organinzation

    Reply
  57. Sriram

    Is there any other investment which guarantees least 7.5% (post tax) for such a long term

    Inflation would have been taken care by the tax benefit

    Reply
  58. Dr Manoj Choradia

    What about 15450/- tax saved on 50000/- invested u/s 80cc1b by a person falling in 30% tax slab ? If that amount is invested as per your calculation ( assuming 10% return in an equity MF, for 15 years),the corpus will be 6456930/- with 3675930/- as wealth gain/ return on investment. No tax will be charged on that amount.Thus NPS seems to me attractive no matter 20% of its corpus being taxable and 40% to be invested in annuity.

    Dr Manoj Choradia

    Reply
  59. Dr Manoj Choradia

    Correction in my post as under ( October 29, 2016 at 4:22 pm ):-

    If i invest saved tax of 15450/- in monthly SIP of 1287/- , the corpus and return will be 537869 /- and 306209 /- respectively.Thus the corpus ( as per writer's calculation ) will be 630000/- ( 40% tax free) + 537869 /- ( after investing saved tax of 15450/- in monthly SIP of 1287/-) = 1167869/- which if fairly close to the corpus accrued after NOT investing in NPS ( 12.61L). There is approx . a difference of only 94000/- . Thus the 20% taxable corpus ( will be 5.7L -0.94L = 4.76L NON TAXABLE ) and 40% annuity corpus ( 3.8L ) turn out be COMPLETEY TAX FREE WHICH CANNOT BE ACCRUED BY NOT INVESTING IN NPS.

    Kindly rectify me if I am wrong.

    Thanks

    Dr Manoj Choradia

    Reply
  60. Dr Manoj Choradia

    It is quite surprising to know after reading a number of articles on NOT INVESTING IN NPS , authors do not pay attention of saved tax of 15450/- and resultant return on it. Actually with NPS you invest 65450/- and without it 34550/-, a difference of 30900 /-/Kindly rectify me if I am wrong.

    Thanks

    Dr Manoj Choradia

    Reply

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