National Pension System (NPS) – Save Tax u/s 80CCD (1B) worth Rs. 15,450

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

We all want to save taxes. We all invest to save taxes. Some invest in PPF, some in ELSS, some in NSC, some invest in 5-year bank fixed deposits. But, we all know the maximum investment limit for saving tax under section 80C is Rs. 1,50,000. So, we all want to save more tax, over and above 80C. But, there are only a limited number of investment options which provide tax exemption other than 80C. One of those options is NPS – National Pension System.

Introduced in Budget 2015, your contribution in NPS can save you tax of up to Rs. 15,450, if you are in the highest tax bracket of 30%. NPS provides an additional deduction of Rs. 50,000 from your taxable income. Interested? Read on.

So, let’s start our journey to know more about this tax saving investment avenue and see whether it truly makes sense to invest in it or it is better to pay tax and invest in mutual funds to earn higher tax-free returns.

How to open an NPS account?

Online Account – There are 2 ways to open an NPS account online – one, directly through NPS Trust’s website and two, through an intermediary, like your bank, ICICI Direct, HDFC Securities etc.

Offline Mode – You can also approach a POS (Point of Service) and get this account opened.

Documents Required – PAN card copy, address proof copy, 2 passport-size photographs, investment cheque and Duly Filled Subscriber Registration Form.

Exclusive Tax Benefit u/s 80CCD (1B)

If you decide to invest in NPS, you can avail a tax exemption of Rs. 50,000 from your taxable income. As the minimum investment requirement is Rs. 6,000, you can contribute any amount between Rs. 6,000 and Rs. 50,000 to save tax.

Which Account is eligible for Rs. 50,000 Deduction – Tier I or Tier II? – Your contribution to Tier I account is eligible for up to Rs. 50,000 tax deduction u/s 80CCD (1B). Tier II account does not entitle you to any tax deduction.

Minimum/Maximum Annual Contribution – As per the NPS rules, you need to contribute at least Rs. 6,000 in this account in a financial year. However, you can do so in multiple instalments and minimum contribution in a single contribution is Rs. 500.

However, there is no upper limit on your contribution to NPS. You can contribute any amount to your NPS account. But, as far as tax benefit is concerned, you can have only up to Rs. 50,000 in tax deduction.

Six/Seven Pension Fund Managers – These are the pension fund managers (PFMs) which are managing the subscribers’ money in NPS at present.

  1. HDFC Pension Management Company
  2. LIC Pension Fund
  3. ICICI Prudential Pension Fund
  4. Kotak Mahindra Pension Fund
  5. Reliance Pension Fund
  6. SBI Pension Fund
  7. UTI Retirement Solutions

Seven Annuity Service Providers – These are the insurance companies which would provide you pension as you retire at 60 years of age.

  1. Life Insurance Corporation of India (LIC)
  2. SBI Life Insurance
  3. ICICI Prudential Life Insurance
  4. Bajaj Allianz Life Insurance
  5. Star-Daichi Life Insurance
  6. Reliance Life Insurance
  7. HDFC Standard Life Insurance

Where your money gets Invested? – Your NPS contribution will get invested in Equity (E), Government Securities (G) or Corporate Debt Securities (C) either as per your own choice (Active Choice) or as per your age (Auto Choice).

Active Choice – Under “Active Choice”, you can have your money invested in these three asset classes as per your own choice. You can allocate your money among these three asset classes (E, G or C), but there is a cap of 50% for Equity (E) investment allocation.

Auto Choice – Under “Auto Choice”, your money gets invested based on your age i.e. the higher your age as the subscriber, the lower would be the allocation for Equity.

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Returns – As NPS is completely market driven, there is no guaranteed/defined return in this pension scheme. Returns get accumulated throughout its tenure and get paid as annuity or lump sum benefit on maturity.

Historical Equity Returns of NPS (Returns as on 31st December, 2015)

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Historical Corporate Debt Returns of NPS (Returns as on 31st December, 2015)

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Historical Government Securities Returns of NPS (Returns as on 31st December, 2015)

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Charges – This account attracts a processing charge of 0.25% of your contribution amount, subject to a minimum charge of Rs. 20, plus service tax as applicable. So, if you contribute Rs. 6,000, then Rs. 20 + service tax will be the charges. In case your contribution is Rs. 50,000, then a charge of Rs. 125 + service tax will be deducted from your account.

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Exit – As you turn 60, you will be required to use at least 40% (maximum 100%) of your accumulated savings to buy a life annuity from an insurance company. Rest 60% or less, you can withdraw as lump sum amount. If you decide to exit before 60 years of age, you will have to buy an annuity with 80% of your accumulated savings, rest 20% amount you can withdraw as the lump sum benefit. Both, annuity income as well as the lump sum withdrawal, will be taxable.

In case of death before 60 years of age, entire pension corpus will be paid to the nominee of the subscriber.

Should you invest in NPS?

Please check this post – Should you invest in NPS Post Budget 2016?

Also, if you think I have missed to cover any important aspect(s) of NPS, then please share it here, I’ll try to include it in the post above.

163 thoughts on “National Pension System (NPS) – Save Tax u/s 80CCD (1B) worth Rs. 15,450”

  1. dear sir,i am a govt doctor.i have deposited 1,50,000-00 in PPf and my PRAN contribution is Rs 76000 in F.Y.2015-16.please tell me can i avail Rs 50000 rebate u/s 800=CCD(1B) or i have to pay extra Rs 50,000-00 in Tier 1 account

    1. If u have made 76000 contribution, it will be most prabably in tier 1 account. If it is, 50000 is eligible for 80CCD1B

  2. Can I invest 50000 in one go – lumpsum in NPS in the last month and get the additional tax benefit under 80cccd. I have not yet opened a account and plan to do it now. With only one month to go, I would like to invest the max 50K in one installment instead of monthly deduction now. Will it get the tax benefits..?

    1. You are correct. Now there is no time. You should invest in one go. After submitting of all docs, considerable time is spent on opening NPS account. But initial subscription given will be considered.

      1. Lic rs 80000 tuition fee rs40000. nps 10% contributions 40000 can I get benefit of rs 80 ccd(1b) for rs 10000 my self Lalchand mob.9813935300 ,9813935342

  3. dear shiv
    what will be the tax on corpus amount payable to the nominee after the subscriber’s death.if it is tax free then it means that although the annuity income is taxable,but the purchase price will be tax free..

  4. Pls compare balanced funds of Mutual funds Vs NPS – I understand balance funds of Mutual funds also follow similar kind of investment pattern like NPS – but in mutual funds – withdrawal will be tax free and at NPS -we have to pay tax – pls advise

  5. I think there is no case to invest in the NPS if entire amount [that is my principal too] is taxed at withdrawal. Typically only the earnings over and above my contributions should be taxed else I think the outgo in the form of tax will be much higher at withdrawal – especially when [at withdrawal] is when you need your money most.

    Comments?

        1. See link
          http://www.businesstoday.in/moneytoday/cover-story/direct-taxes-code-national-pension-scheme-tax-benefits/story/190167.html

          NPS requires you to compulsorily purchase an annuity so that you get some money in lump sum and the balance in annuity. Broadly, the lump sum and annuity are both taxable under the I-T Act as NPS follows an Exempt-Exempt-Taxable (EET) concept.

          Under the proposed Direct Taxes Code (DTC), NPS will be covered under the Exempt-Exempt-Exempt (EEE) regime, wherein the investor will enjoy tax benefits when contributions are made.

          The accumulations to the fund will continue to be taxfree; withdrawals from the fund are proposed to be exempt.

          However, there is confusion if along with lump-sum withdrawal, earning from annuity (which is mandatory under NPS) will also be tax-free.

    1. Budget 2016 has made a portion of NPS withdrawal tax exempt, so it is a relief for the subscribers to an extent. Moreover, if you invest the remaining 60% for buying annuity, it is completely tax exempt.

  6. I had filled up online aplication at eNPS. After failed transaction( due to mistake on my part), it took 5 working days for payment gateway to reset. And then I was able to do the payment transaction at eNPS. After Payment by netbanking,PRAN number was automatically generated. Now KYC will be done online automatic by my bank without my intervenion (Hope So).
    Also I will have to send print out of online application after affixing photo and signature to Mumbai.

      1. Many benefits. You can be in everyone’s mobile.
        you can send notification to them whenever you like, or whenever you post new article.
        You can directly get in touch in real time as you can have an option to have their email id / number as login credentials.

    1. Hi Sahil,
      Annuity income and lump sum withdrawal, both are taxable. It is what you need to decide whether you want to stay invested in such a scheme or not which matures as your turn 60.

    2. Hi- i understand that the returns on maturity (at age 60) are taxable. However, for people who will be retired at 60 and may not have significant income at age 60, the lumpsum returns may not fall in the taxable range. Is this understanding correct?

  7. Dear Shiv – Got a doubt about my own (employee) contribution. As part of my CTC, I’ve allocated INR 1,000 per month which comes under Employer Contribution to NPS. Aligning with this, I’ve got my PRAN no and getting the annual account statements. But if I want to get my own investment benefit (under employee contribution), do I need to create one more NPS or can I continue to invest on the same existing one. It’ll be great, if you kindly provide a clarity on this regard.

    1. Hi Rajaram,
      You are not required/allowed to open another NPS account to get tax benefit u/s 80CCD (1B). You can make your own contributions in the same account and avail tax benefits.

  8. Hi Shiv,

    Thanks for the very informative post, as always.

    Could you please address the following questions:
    – Is the taxation applicable on the entire corpus or just the capital gains? If it is prior, then this is just a case of deferred taxation.
    – Is taxation only at the end, and as per the tax bracket or at any special rate?
    – In what range does the RoR from an annuity plan typically fall?
    – Is the annuity corpus returned to the nominee after death?
    – Finally, what are your thoughts on annuity RoR 25-30 years from now?

    Overall I don’t find this as a very attractive proposition due to following reasons:
    – Taxation
    – Annuity condition
    – Equity maxed to 50%

    A quick back-of-the-envelope calculation shows that if a 35 year old invests 50,000 per year in equity until he’s 60, and the tax-free corpus builds to 2 crore, the IRR is 17.9%. Alternatively, if he invests 35,000 each year (considering 15,000 tax benefit of 80CCD) in NPS, and the corpus builds to 2 crore, which becomes 1.43 crore post taxation (assuming 30% tax rate on the capital gains), the IRR is only marginally higher equal to 18.0%.

    Your thoughts are welcome.

    Thanks,
    PP

    1. Thanks PP,
      1. Yes, it is a case of deferred taxation, both annuity income as well as lump sum withdrawal are taxable.
      2. Lump sum withdrawal would be considered as capital gain and annuity income would be treated as regular income and would be taxed accordingly.
      3. Historical returns are mentioned in the tables above.
      4. Yes, corpus amount is payable to the nominee after the subscriber’s death.
      5. As India grows, I think return should be in the range of 3-6% 25-30 years down the line.
      6. Your reasons for not liking this scheme are genuine, but to be fair, I think we expect too much from the government and ultimately everything gets spoilt a few years down the line.
      7. I’ll respond to your calculations soon.

    1. Yes Harinee, annuity income is taxable as per the current tax rules. But, as it is a pension plan, I think annuity payments should be accepted as a fundamental feature of this scheme. But, if the government decides to make it flexible, it would be a welcome move.

  9. The form you have included in the link is old form and is no longer accepted by banks. You have to fill in the new form. I gave my old form and after a month the bank told me that my form has been returned because it is a old form. I have to give them now new form.

  10. It is still ok for me that I was not able to make payment. If after payment, something goes wrong, then ……………..

  11. Thanks for the new post.
    Many of us are aware of the benefits of NPS but their service is very poor if not disaster which dissuades public at large. I filled up online application on http://www.enps.nsdl.com. At the time of payment, gateway did not work, It has been five days now and still I cannot make payment. Nothing works – Query on email, facebook, their toll free number, their landline number. Nothing Works. They are non-contactable.

    1. Hi Pankaj,
      I understand your concern, but we can’t change these things. As service standards here in India are poor, I think most of our public sector activities should be privatised. But, there are many NPS accounts already opened, so if you are facing problems, it is better to get it opened offline and afterwards fund/operate it online.

      1. Pls tell me how to transfer the amount from tier 2 to tier 1 in nps….is it possible through nps app…..Nd after how many days one investment reflects in account….as even after 3 days it doesnt reflect in my account

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