The Budget has proposed an additional deduction of Rs 50,000 if you invest in the NPS. Find out if and why you should invest in the scheme

Finance Minister Arun Jaitley has given a reason to do something he has never done before. We can make first investment in the NPS for the additional tax deduction under Section 80CCD (1B) announced in the Budget. He is not alone. Millions of tax payers are now considering the government sponsored scheme, which was opened to public investors nearly six years ago but has not managed to draw a meaningful number of investors.

Though the budget has not altered any feature of the NPS, the additional deduction of `50,000 under Section 80CCD (1B) will prove a big incentive. Someone in the 30% tax bracket (earning over `10 lakh a year) will be able to save up to `15,450 in tax.

WHAT FINANCIAL PLANNERS SAY

Till now, most planners did not recommend the NPS to their clients. But now, most experts we spoke to believe that it is a good time to open NPS accounts. We were not recommending NPS earlier. But now it has become attractive because no other investment option can get you that additional `50,000 deduction. Others, who were already recommending NPS to their clients, are thrilled. The NPS has become better with one more incentive.

But there are also those who think that one should not be swayed by tax benefits alone. Go for it if it suits your risk profile and investment horizon.

INFLEXIBLE INVESTMENT RULES

The investment rules of the NPS that cap the equity allocation to 50% of the corpus. Younger investors might find this too conservative for their risk profile.

There is another problem. The 50% allocated to equities is invested in Nifty stocks in the same proportion as their weight in the index. So, essentially investing in the equity fund of the NPS is like investing in an index fund benchmarked to the Nifty. Though this does reduce the risk, it also caps the potential returns. If you are investing in the NPS, opt for the maximum 50% exposure to equities. Given that the corpus will be invested in Nifty stocks, there is little to worry. For investors who cannot decide the allocation, the Life stage Fund is a useful option. Under this, the allocation to equities is defined by the age of the individual. This is the default option to be followed if the investor does not mention the desired asset allocation. However, some experts think this is not a good option because it is too conservative. Equity exposure is already capped at 50% and will progressively come down after the age of 35 under this option. It is better to take the active option and keep your equity allocation to around 50% till you turn 50.

It is best to stagger your investments across several months, much like the SIP strategy in a mutual fund. However, don't make too many small contributions. There is a transaction charge of 0.25% or `20 (whichever is higher) on every contribution.

Also, a long-standing problem remains. The NPS corpus is taxable at the time of withdrawal. Other retirement options like the PPF are tax free on withdrawal. Even insurance policies give tax-free income under Sec 10 (10d).