What should I do with my NPS under the new tax regime?

Under the new tax regime, what should we do with the investment in NPS (Rs 50,000 per year) u/s 80CCD 1B? Can it be stopped or is it better to continue without any tax benefit? - Atmaram Sakharam Khanvilkar

Whether to continue investing in NPS Tier I in the absence of tax benefits depends on how disciplined you are with your retirement investing.

While the primary objective of NPS is to build a retirement corpus, most people view it merely as a tax-saving instrument.

Investing in NPS Tier I offers three tax deductions:

• Deduction of up to Rs 1.5 lakh from taxable income under Section 80C.
• Additional deduction of up to Rs 50,000 under Section 80CCD (1B) of the Income Tax Act, exclusively available through NPS investment.
• The third deduction is in the form of employer's contribution of up to 10 per cent of salary (basic component + dearness allowance) to the NPS Tier I account. It is not considered taxable income, which reduces the tax burden. In the case of government employees, it's 14 per cent instead of 10 per cent.

Under the new tax regime, the first two deductions are not available, but the third one continues. Forgoing the first two deductions can be discouraging to continue investing in NPS Tier I, especially when the investment remains locked until the age of 60.

However, the withdrawal restriction itself can be advantageous for someone who lacks retirement investment discipline. Often, people dip into their retirement savings for non-critical expenses. The withdrawal limitation ensures that retirement funds are only used for their intended purpose.

Even without the tax benefit, investing in NPS can help secure your retirement if you struggle with discipline in saving. If you are at least five to seven years away from retirement, consider allocating as much as possible in equities through the 'active' investment option.

However, if you are a disciplined investor, mutual funds may be a better investment option than NPS. Just keep in mind that to keep your NPS account active, you need to invest at least Rs 1,000 every year.

Suggested read: NPS Tier 2 vs mutual funds: A head-to-head comparison