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Should You Invest in NPS Post Budget 2. 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. Budget 2. 01. 6 has proposed a significant change in the taxation laws for National Pension Scheme (NPS). It has been proposed by the finance ministry to make 4. But, does it make any sense to invest in NPS post this amendment or should you continue investing in equity mutual funds or PPF for your retirement years? We all know that our contribution up to Rs.
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NPS provides us tax deduction under section 8. CCD (1. B). Unlike investments eligible for tax deduction u/s 8. C, 8. 0CCD (1. B) provides an exclusive tax benefit for NPS. So, if you do not contribute in NPS, you need to pay tax as per your respective tax slabs. So, should you save tax by investing in NPS or just pay tax and then invest the remaining amount in equity mutual funds, PPF or debt mutual funds for wealth maximisation? Honestly speaking, it is not an easy decision to take.
To come to a conclusion, I’ll do a couple of comparative analysis here – one, comparing an investment in Equity Mutual Funds with NPS and the second one, comparing an investment in PPF with NPS. We will also have to make certain assumptions here based on which this analysis would come to a conclusion and you are most welcome to agree or disagree with my assumptions here because I am as human as you are and that is why there is enough scope of me committing mistakes as bad as anybody else on this earth. Here are the assumptions I have made in this analysis: You are 3. You are in the 3. Rs. 1. 5,4. 50 as tax in case you decide not to invest Rs.
NPS. Equity Mutual Funds would generate on an average 1. PPF would generate on an average 8. NPS with 5. 0% contribution towards equity, 2. Government Debt and 2. Corporate Debt would generate on an average 1. To provide more clarity here, I have assumed 1.
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So, should you invest in NPS for saving Rs. Scenario I – Say No to NPS in the present scenario, as it is not advisable to invest in NPS even with the exclusive tax benefit it enjoys u/s 8. CCD (1. B). Your investment of Rs.
Rs. 5. 0,0. 00 invested in the NPS. Here is what you’ll have in your retirement corpus at the end of 2. Portfolio I – NPS – 5. Rs. 5. 0,0. 00 invested in equity index, 2. Government securities and 2. Retirement Corpus Rs.
Portfolio II – Equity Mutual Funds – 1. Rs. 3. 4,5. 50 invested in diversified equity mutual funds – Retirement Corpus Rs. Portfolio III – PPF – 1. Rs. 3. 4,5. 50 invested in PPF – Retirement Corpus Rs.
So, the above calculation clearly shows that investing in diversified equity mutual funds would generate the highest retirement corpus for you, even after paying 3. Rs. 1. 0 lakh. But, there are certain points which you need to keep in mind here which are in favour of NPS. Firstly, from taxation point of view, I think the present situation is not the best one for NPS and it could only improve from hereon.
There is still a lot of scope of improvement for making NPS a better product to invest in. Also, I think the present taxation laws are already highly favourable for equity mutual funds. So, let us have a look at some other scenarios and whether it is a ‘Yes’ or a ‘No’ for NPS in those scenarios. Scenario II – Say No to NPS, if you are in the 2. You should rather invest in equity mutual funds to generate a healthy corpus for your retirement years.
Scenario III – Say No to NPS, even if you think this government or some other government will increase the exempt portion of your lump sum withdrawal in NPS from the current 4. Watch Breakfast At Tiffany`S Online Facebook more. Scenario IV – Say Yes to NPS, if you believe in the theory of “one bird in hand is better than two in the bush”.
If you decide not to invest in NPS to save Rs. Rs. 3. 4,5. 50 only to invest. With NPS, your first tax outgo will happen when you retire at the age of 6. Then also, if you withdraw 4.
You’ll be required to pay tax only on the annuity income you would receive on your investment. On the other hand, if you decide not to invest in the NPS, you’ll have to pay a tax of Rs. Rs. 3. 4,5. 50 in equity mutual funds will take a long 2. NPS as far as a higher retirement corpus is concerned. Scenario V – Say Yes to NPS, if you fall in the 3.
LTCG) on equity mutual funds taxable anytime during the next 2. Even a 1. 0% LTCG tax on equity mutual funds will make NPS a better retirement product to invest in. Scenario VI –Say Yes to NPS, if you are hopeful that this government or some other government would allow you to invest more than 5.
Rs. 5. 0,0. 00 in equity portion of NPS. Personally I think there should an option allowing you to invest 1. That would make NPS an attractive investment for me to save tax. Scenario VII – Say Yes to NPS, if you are hopeful that this government or some other government would give you the liberty to invest 6. Scenario VIII – Say Yes to NPS, if you are a conservative investor and don’t want 1.
With NPS, even 5. NPS vs. Equity Mutual Funds vs. PPF – Other Factors. There could be other such scenarios based on which your decision to invest in NPS could change. If you think I have missed any such significant scenario, then please share it here, I’ll incorporate that also to make it an even more comprehensive analysis.
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