Is NPS worth the Hype?

[knight]

For taxpaying individuals with old regime, NPS sounds like a good option to save some taxes while being able to invest our money for retirement.

But does the 'Income Tax Saving' really help in the long run?

Does Investing more in NPS (as a result of tax saving) actually translate to a bigger Retirement Corpus or better returns?


Firstly, it comes with its own challenges/cons.

• Lockin till retirement, near zero liquidity.
• Only being able to withdraw 60% as lumpsum and 40% in annuity.
• Subject to change in govt policies over next 30 years.
• Having at least 25% invested in bonds.
  (The last one is not really a con but since it's a long-term locked investment, going all in on equity for the initial years may not be a bad option.)

The focus of this discussion is investments under section 80CCD.

Calculation:

Assumptions:

• For calculation, I took 50,000 as the yearly investment.
• NPS rate or return: 10%
  Mutual Fund return rate: 12%
  Reason for assumption: Atleast 25% of our NPS Corpus is invested in bonds which would slightly lower the effective return.
  Most online articles and videos also make the same assumption.
• Tax Slab: 30%
• I've used Excel FV Final Value function for this example, but other SIP/investment calculators also gave similar results.

Conclusion:

• The Final corpus value of Mutual Funds was 4 Lakh more than NPS.
• After 10% LTCG deduction, the in-hand value of MF is 4.5L short of the Total NPS Value.
  (The difference would be Zero if MF gave just 0.5% more returns)
• Even though NPS seems to be at par, we can only access 60% of it, which is 28L less than MF after tax.
• Annuity is really confusing. For 32L invested, HDFC NPS Pension calculator shows 19k per month. The value of which would be far less 30 years from now.

Even though 30% upfront tax saving sounds attractive, the actual effect on the total corpus is minimal.
Plus, there's almost zero liquidity. A big part of our expenses, like buying a house, marriage, child education, and emergencies happen before 60.

There can be an argument of 'peace of mind', having a 'retirement corpus' etc. But a responsible investor would be able to achieve it even without the lockin period.

Judging from real monetary impact, I don't see a lot of benefits investing in NPS. The investment is 'just as good' as paying taxes directly investing in Mutual Funds, and comes with far more restrictions.

What are your views on NPS?
Would you like to suggest any changes in the calculation methodology?

 

[knight]

Please consider this post as an open discussion.
The motive is to understand different perspectives and learn.



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[sxchzy]

does the MF calculation not consider ELSS?

 

[knight]

does the MF calculation not consider ELSS?

ELSS falls under section 80C, where ELSS would win hands down over NPS.

The calculation focuses on section 80CCD. Which is exclusive to NPS.

80CCD(1) allows us to contribute 10% of basic salary directly to NPS.
80CCD(1B) allows additional 50k NPS invenstment over and above the 1.5L 80C limit. (Making the total deduction 2L)

Both these are over and above the usual 80C investments, thus the question is - Is it worth sacrificing more disposable income and blocking it in NPS, just to save 30% income tax.

 

[gauravbhati]

But isn't NPS good option, if someone already claimed the deduction under S. 80(c) using the PPF/GPF ??

Does ELSS deduction claimed as additional deduction other than 80 C ?

 

[knight]

But isn't NPS good option, if someone already claimed the deduction under S. 80(c) using the PPF/GPF ??

Does ELSS deduction claimed as additional deduction other than 80 C ?

Check my calculation once again..

ELSS is not allowed beyond 80C 1.5L limit.


The catch is that NPS is giving us immediate gratification of tax savings. But in reality, it is also locking our money till retirement at possibly a lower rate of return than equity.

Now a disciplined investor could have simply paid tax and taken the remaining money, invested in the market, and he'd still be able to build the same retirement corpus, mathematically. Without having his money locked for 60 years. So in a crisis, he still has the option to use that money and restore it later.

 

[gauravbhati]

Check my calculation once again..

ELSS is not allowed beyond 80C 1.5L limit.


The catch is that NPS is giving us immediate gratification of tax savings. But in reality, it is also locking our money till retirement at possibly a lower rate of return than equity.

Now a disciplined investor could have simply paid tax and taken the remaining money, invested in the market, and he'd still be able to build the same retirement corpus, mathematically. Without having his money locked for 60 years. So in a crisis, he still has the option to use that money and restore it later.

Yaa got your point.. Although I invest mostly in equity and MFs. But all of sudden my dad is interested in NPS so for the last 2-3 days I was researching deep on 80 C deduction. Anyways your point is right. I do invest that money in diversified funds, already got return which is more worth than NPS.

 

[champaklal]

Please consider this post as an open discussion.
The motive is to understand different perspectives and learn.



@TechnoFino
@Wealth is my birth right!
@Chaitanya-a
@pprakash11
@VISHESH_BANSAL
@4uziaul
@jack333
@S S V
@sxchzy
@ashwink
@Slayer
@TheMentalist
@vaibhav111
@Walter White
@Rkr
@plastikman
@the_dark_knight
@prtraj
@curios_mind_huh
@infinia_finally
@CAKARANBATRA

Ye list me aane ke liye kya karna padega 😝

 

[gowthamv]

My opinion is..
Majority of people invest in NPS only due to the 50k tax exemption.
New NPS investments would slowly start fading away if the government removes the Old Tax Regime completely.

(If the 80C exemption was 2L instead of 1.5L, I would happily invest my another 50k in ELSS and not in NPS.)

 

[sm9811911]

For taxpaying individuals with old regime, NPS sounds like a good option to save some taxes while being able to invest our money for retirement.

However, it comes with its own challenges/cons.

• Lockin till retirement, near zero liquidity.
• Only being able to withdraw 60% as lumpsum and 40% in annuity.
• Subject to change in govt policies over next 30 years.
• Having at least 25% invested in bonds.
  (The last one is not really a con but since it's a long-term locked investment, going all in on equity for the initial years may not be a bad option.)

The focus of this discussion is investments under section 80CCD.

Calculation:

Assumptions:

• For calculation, I took 50,000 as the yearly investment.
• NPS rate or return: 10%
  Mutual Fund return rate: 12%
  Reason for assumption: Atleast 25% of our NPS Corpus is invested in bonds which would slightly lower the effective return.
  Most online articles and videos also make the same assumption.
• Tax Slab: 30%
• I've used Excel FV Final Value function for this example, but other SIP/investment calculators also gave similar results.

Conclusion:

• The Final corpus value of Mutual Funds was 4 Lakh more than NPS.
• After 10% LTCG deduction, the in-hand value of MF is 4.5L short of the Total NPS Value.
  (The difference would be Zero if MF gave just 0.5% more returns)
• Even though NPS seems to be at par, we can only access 60% of it, which is 28L less than MF after tax.
• Annuity is really confusing. For 32L invested, HDFC NPS Pension calculator shows 19k per month. The value of which would be far less 30 years from now.

Even though 30% upfront tax saving sounds attractive, the actual effect on the total corpus is minimal.
Plus, there's almost zero liquidity. A big part of our expenses, like buying a house, marriage, child education, and emergencies happen before 60.

There can be an argument of 'peace of mind', having a 'retirement corpus' etc. But a responsible investor would be able to achieve it even without the lockin period.

Judging from real monetary impact, I don't see a lot of benefits investing in NPS. The investment is 'just as good' as paying taxes directly investing in Mutual Funds, and comes with far more restrictions.

What are your views on NPS?
Would you like to suggest any changes in the calculation methodology?

2 main assumptions you want to reconsider
1) 10percent ltcg. This is likely to increase as equity matures.
2) 12% and 10% returns. This is optimistic.
Can you do a version with 8 and 9 % returns. Plus do 20% ltcg.

 

[tushu5121]

Govt. Taking eyes..
Discus private i fear govt remove NPS or make it taxable.
As govt finding ways to lavy new new taxex..🤣🤣🤣

 

[Aditya12]

I'm not investing in NPS for exactly the same reasons you've listed. At times I do think about it especially the year end when I'm doing my calculations and it shows that I'm able to save another 10-15k just by investing 50k but then what has stopped me since 2-3 years is foreseeing govt's plan to phase out old regime. I just don't think it is here for more than 4-5 years.

I'm not comfortable investing in something so long term that I see may become very less attractive or of no use. We'll eventually stop investing in it and I simply don't want to end up having an annuity plan so small that when I'm retired the monthly pension from that does not even pay my monthly internet bill.

 

[dungeonMaster]

Well I eventually feel the same. Even if you're a bit of seasoned investor with right set of knowledge, you can easily beat mutual fund 15% returns.
15% returns are difficult for fund managers because they have alot of corpus to manage but in case of individual one can easily make 20-30% returns.
Although I put a significant amount of my salary in both pf and nps monthly. Around ~31k per month, I do it just to save taxes.
But hearing news that in last 2 years pf rejected claims is 35% that doesn't give comfort at all.

 

[knight]

2 main assumptions you want to reconsider
1) 10percent ltcg. This is likely to increase as equity matures.
2) 12% and 10% returns. This is optimistic.
Can you do a version with 8 and 9 % returns. Plus do 20% ltcg.

Here you go!

Although 9% seems conservative for equity, but as equity matures, the ideal Nifty returns would reduce slightly.
Which also means, that smart investing (midcaps, sectoral, value buys) would do better than both Index fund and NPS.

And i also agree with LTCG increasing over time.

One key note is that the reason Mutual Funds are able to beat with just 34k invested is because of the compounding that happens over long years.
If the difference between 'Rate of return' or the 'Number of Years' were to reduce, the odd would shift towards NPS as MF won't have enough levarage to compond.

 

[knight]

My opinion is..
Majority of people invest in NPS only due to the 50k tax exemption.
New NPS investments would slowly start fading away if the government removes the Old Tax Regime completely.

(If the 80C exemption was 2L instead of 1.5L, I would happily invest my another 50k in ELSS and not in NPS.)

True. Even I only invested in NPS so far for the 50k extra deduction and Employer NPS deduction that some companies offer.
And with the new regime taking over, govt would make NPS less attractive. I doubt how relevant it would be 15 years from now.

ELSS would be far better than NPS. But making taxes better isn't what govt focuses on, does it?

 

[sid16]

Please give at least some if not significant weight to asset allocation which equity mutual fund would not do, and if you're going for hybrid mutual fund then returns are similar with LTCG at the end of it. Since it is literally "National Pension System", it is a retirement tool and hence it is to be touched only after retirement, unless there are emergencies for which withdrawals are possible in NPS too.

It is assumed that NPS is not the only investment you're doing. Of course everyone would be doing MFs and NPS on top of it. I do 4200 NPS SIP every month. No fuss. It's good.

Whether it is worth the hype, I'll let you know in 30 years.

 

[knight]

I'm not investing in NPS for exactly the same reasons you've listed. At times I do think about it especially the year end when I'm doing my calculations and it shows that I'm able to save another 10-15k just by investing 50k but then what has stopped me since 2-3 years is foreseeing govt's plan to phase out old regime. I just don't think it is here for more than 4-5 years.

I'm not comfortable investing in something so long term that I see may become very less attractive or of no use. We'll eventually stop investing in it and I simply don't want to end up having an annuity plan so small that when I'm retired the monthly pension from that does not even pay my monthly internet bill.

Very valid points.

That Indian urge to save every last bit of taxes at FY end is unbeatable.
The annuity condition is the biggest turndown for me. Even after saving for my entire career, if I can't control my retirement money, then what's even the point of having it? I might just be getting hefty hospital bills or thinking of building my dream farmhouse or that international vacation. But my money would be locked in annuity and would barely cover groceries.

 

[knight]

Well I eventually feel the same. Even if you're a bit of seasoned investor with right set of knowledge, you can easily beat mutual fund 15% returns.
15% returns are difficult for fund managers because they have alot of corpus to manage but in case of individual one can easily make 20-30% returns.
Although I put a significant amount of my salary in both pf and nps monthly. Around ~31k per month, I do it just to save taxes.
But hearing news that in last 2 years pf rejected claims is 35% that doesn't give comfort at all.

I just read about the rising rejection rates after I saw your post.
PF is the new crypto. 🤷🏻‍♂️

 

[knight]

Please give at least some if not significant weight to asset allocation which equity mutual fund would not do, and if you're going for hybrid mutual fund then returns are similar with LTCG at the end of it. Since it is literally "National Pension System", it is a retirement tool and hence it is to be touched only after retirement, unless there are emergencies for which withdrawals are possible in NPS too.

It is assumed that NPS is not the only investment you're doing. Of course everyone would be doing MFs and NPS on top of it. I do 4200 NPS SIP every month. No fuss. It's good.

Whether it is worth the hype, I'll let you know in 30 years.

The thing about asset allocation is, that my current portfolio always has a decent debt and emergency fund portion.

So NPS doing it again for me with the money i won't really use for 25+ years seems unnecessary.
And ofcourse, If I take it and invest it with the rest of my money, keeping it isolated in equity would be quite hard unless I make a different folio for retirement.

The 'Retirement Instrument' factor is true, but even at retirement we only get to touch a part of it. And god knows where the 40% rule would be in the next 30 years.
There's really no winner here between NPS and self-investing.
It's more about whether we're comfortable letting govt handle a part of our corpus or whether we would rather manage it ourselves.
The answer, only time will tell.

 

[AyushJaju]

Income tax benefit is only available in old scheme and not in new scheme of taxation (new regime u/s 115BAC).

Exception: 80CCD(2) i.e. Employer's contribution.

However if you are getting income tax benefit then you have to consider initial benefit of 31.2%~39% on actual contribution every year.. Like you are actually investing 61-70% only of amount in your calculation.