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. 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.

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. Mr Rego says that investors in 20 per cent and 30 per cent tax brackets can look at investing in NPS due to the tax savings.

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.

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.

By Premji