Jaitley Gives Rs 50,000 Extra Tax Deduction on NPS: Should You Invest?

In the Budget, Finance Minister Arun Jaitley introduced an additional income tax deduction of Rs 50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD. NPS is a voluntary pension scheme, which is regulated by the Pension Fund Regulatory and Development Authority.

The extra deduction of Rs 50,000 on NPS can help those in the highest tax bracket of 30 per cent save an additional Rs 16,000 in taxes. Those in 20 per cent tax bracket can save over Rs 10,000 while those in 10 per cent can save over Rs 5,000.

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Financial planners say though NPS investments can help add to one's retirement income, the scheme does not score high in terms of taxation and flexibility.

Anil Rego, CEO of financial advisory firm Right Horizons, said investors should go for NPS only if they have exhausted their Section 80C limit. After the extra Rs 50,000 deduction on NPS, the total deduction allowed under Section 80C and 80CCD of Income Tax Act goes up to Rs 2 lakh, from earlier limit of Rs 1.5 lakh. Section 80C relates to deduction allowed under investments in instruments like, provident fund, PPF and insurance policies.

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The withdrawal from NPS are taxed as opposed to tax-free status on other retirement savings schemes like public provident fund (PPF) and employee provident fund (EPF). Also, in NPS, subscribers have to compulsorily use a part of the kitty for getting pension from an annuity service provider for regular monthly pension. Subscribers can exit from NPS upon attaining the age of 60 but at least 40 per cent of the accumulated pension wealth of the subscriber needs to be used for purchase of an annuity. If subscribers exit before attaining the age of 60, they have to use at least 80 per cent of the accumulated wealth for purchase for annuity.

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Pension is treated as salary and is taxed but in retirement years investors' income go down which can help cushion the tax impact, Mr Rego said.

Mr Rego however says that investors in 20 per cent and 30 per cent tax brackets can look at investing in NPS due to the tax savings but to the extent their tax would not be impacted by the pension they would get from the savings accumulated in their NPS kitty.

Financial planner Kartik Jhaveri says that though NPS can potentially deliver better returns than PPF and EPF, taxation on withdrawal and compulsorily buying of pension are negatives for the scheme.

Under NPS, subscribers invest in a fund chosen by them and at the time of retirement they get a lump sum amount depending on the performance of that fund. The returns from NPS are not guaranteed; they are market-linked. Investors have the option for choosing stocks, government bonds and other securities as their asset choice. But the equity part of the allocation cannot exceed 50 per cent.

Suresh Sadagopan, the founder of Ladder 7 Financial Advisories, says investors in higher tax brackets can look at NPS because the low-expense structure of NPS and its equity component can help deliver higher returns than other traditional investments.