Is NPS worth the Hype?

[knight]

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.

I believe you mean the ~32% income tax that we don't pay while putting in NPS..
It's factored in as NPS contribution is considered 50K while MF contribution is considered 34K

 

[SamPtnk]

NPS is very good for dynamic allocation with low ER

People withdraw from MF once they see some gains or if market falls , constantly change MF if it under performs for 2 month

Since NPS locks you out till 60 you wont have the itch to withdraw

Always Time in the market > Timing the market

 

[_ayush]

Yeah the discipline factor is quite important too. It might even cause NPS to outperform MFs.
Another thing is if you factor in inflation(assuming 8.1%), 28L after 30yrs would be like 2.5L today which is not a huge deviation for someone in 30% tax bracket. Although yes the annuity of 19k would be pretty useless as well.

 

[dungeonMaster]

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

Yeah, it feels bad that we don't even have control over our money. Eventually, I am gonna reduce these and increase my control.

 

[knight]

Yeah, it feels bad that we don't even have control over our money. Eventually, I am gonna reduce these and increase my control.

In reality, we never really get full control over our money until we actually have it in our hands.
There are always scams happening even in fund houses, banks, and other institutions.
Diversification just helps us ensure that we won't get ducked by a few failing institutions.

Even I'm planning to reduce my NPS contribution and try to make better use of that money.
I didn't opt for voluntary PF. Only contributing enough to match employer contribution.

 

[abhiver]

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?

I only invest in NPS due to Tax benefit.

Baaki sab moh-maya hai usmein

 

[knight]

I only invest in NPS due to Tax benefit.

Baaki sab moh-maya hai usmein

I think the long post was causing some confusion.
So I've added 2 questions at the top for better context.

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?

The discussion/calculation is about whether the 80CCD tax saving actually benefits you? Or does NPS just locks away your money till 60 and still gives you less returns than what you'd have gotten on your money after paying income tax.

 

[coolguy1]

For the tax benefit, it does make sense.

But if you're smart enough and can make the average returns + tax savings + extra returns, you can invest in other better assets.
(Do note that this can get risky and unsuitable for most investors as they don't have the knowledge, time or resources)

 

[Deleted member 9785]

Rejection of final EPF claims sees surge in 5 years, up from 13% to 34%

EPFO rejections: Out of the three PF claim categories – final settlement, transfer and withdrawal – the rejection rate has sharply increased for the final settlement of PF claims over the last five years.

indianexpress.com

scary stuff man

 

[Zacobite]

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?

1) Cheaper than MFs on costs
2) Upfront tax benefits need to be incorporated into calculator especially if you are on corporate NPS +50k option which is significantly high for 30% tax slab folks
3) Options to go upto 75-80% equity for aggressive investment - so compare mf type accordingly
4) Specific instrument for Annuity - thats the whole point of Pension
5) Most important is that you can change your strategy of allocation between equity / bonds debt easily.. in an MF you cannot.. You have ro change your fund with exit/ entry loads
6) The best of best MF managers are also managing the NPS funds
7) Returns annual will be assumed similar to MFs but with costs + upfront tax kicking in.. NPS will yield more compunded

 

[Zacobite]

For the tax benefit, it does make sense.

But if you're smart enough and can make the average returns + tax savings + extra returns, you can invest in other better assets.
(Do note that this can get risky and unsuitable for most investors as they don't have the knowledge, time or resources)

it will be more for sure if you take tax benefits inro account. Simply put with numbers - If you earned 1 L and tax at 30% - You got 70k in hand which you put into MFs. Alternatively if Company put 1 L directly into NPS you saved 30k tax.. Thats a 30 % more investment into NPS.. No extra returns on MF can catch up with that..Just that tax benefits have limits.. and NPS needs lot of discipline.. while mfs are flexible but more expensive on costs

 

[sm9811911]

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.

Thanks for doing it. Huge difference if you just change 2 factors.
On equity returns, 30 years is a long timeframe and basing it on the recent equity markets returns may not be reasonable. 1) Japanese markets were at the same level for last 30 yrs. 2) it will be difficult to manage equity mf. I don’t remember any of the mf that were highly rated 15 years back delivering good returns in the last 2-3 years. Survivorship bias etc kicks in. Safe bet will be to invest in nifty but as you said returns will be lower for that.

 

[Deleted member 9785]

vpf @8.2% (tax free) is good as it can be widrawn after 5 years also

 

[Narayana526]

Am putting my money in NPS for the last 3+years for different reasons
1.10% direct cut from pre-tax salary( Am into 30% Tax bracket)
2. putting an additional 50K PA for tax saving
3. To get decent debt allocation from a PF standpoint ( There is always a debate on EQMF + EPF combination) - I have stopped investing in FDs and NCDs and I treat NPS as a pure aggressive hybrid debt investment given that NPS EQ has stringent rules on where to invest (https://www.etmoney.com/learn/nps/new-rules-for-nps-fund-managers-how-will-they-impact-your-returns) - - Not expecting more than 8-10% at NPS PF level

If I put money in NPS for 15 years - (I started investing in NPS in 2021 at the age on 31)

=fv(0.1/12,180,14000,0,0) --> which gives you around 58L --> ( so am in 46) --> Assuming am stopping working in corporate here and not contributing any penny towards NPS

Keep this money for another 14 years to attain 60YR at an assumption of getting 7%pa for this period ( =fv(0.07/12,168,0,-5800000,0) ) Which comes -- > 1.54cr

40% of this 60L - we might get 35-45K Per month as an annuity --> at 5% Inflation it is equivalent to 9K as of now ( =pv(0.05/12,348,,40000,0) )

invest 94L in different debt and EQ to get a 6-7% return at the PF level.

PS: if you are above 40years, please avoid NPS given the lockin and other pre-mature exit conditions
And i have taken very very conservative calc here, please do your calculations.

 

[curios_mind_huh]

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.

The longer you stay invested in NPS at 10%, the better the MFs at 12% will look even after including 31.2% tax benefits with NPS & discounting 10% capital gains with MFs.

One thing you could do to improve the situation is treat the saved tax amount (31.2%) from NPS as free money and invest it in a Equity MF. This would make sure that you'll have ~11% or slightly higher overall returns. But at the end of day, MFs at 12% will come out higher even with this strategy for an investment period more than 25 years.

You should seek clarity about the goal of your investment before proceeding with NPS. Or any investment for that matter. If your goal was to save taxes with NPS, you will succeed in the short term since no one can give you 31.2% returns in a year. If you want to have a long term slightly risk averse investment, NPS is still a good option for growth. If you are an aggressive investor and don't mind the risks with 100% equity for (really) long term, Equity is the way to go and NPS will not suit your needs.

 

[phagocyte536]

I realised this after 2 years of 50k invesment into NPS. Now that money is just stuck there and I am not contributing anything more than 1k/year mandatory requirement.

Also I am better off in new tax regime, so the saving tax part doesn't even apply to me. Although I might rethink about Employer contribution to NPS if my employer agrees (current one doesnt). Employer NPS is tax free even in new regime

Also my wife is a govt employee thus forced to have a large NPS contribution.

 

[curios_mind_huh]

I realised this after 2 years of 50k invesment into NPS. Now that money is just stuck there and I am not contributing anything more than 1k/year mandatory requirement.

Also I am better off in new tax regime, so the saving tax part doesn't even apply to me. Although I might rethink about Employer contribution to NPS if my employer agrees (current one doesnt). Employer NPS is tax free even in new regime

Also my wife is a govt employee thus forced to have a large NPS contribution.

You should be able to withdraw the whole amount after 5 years if it is less than 2.5L

 

[Zacobite]

The longer you stay invested in NPS at 10%, the better the MFs at 12% will look even after including 31.2% tax benefits with NPS & discounting 10% capital gains with MFs.

One thing you could do to improve the situation is treat the saved tax amount (31.2%) from NPS as free money and invest it in a Equity MF. This would make sure that you'll have ~11% or slightly higher overall returns. But at the end of day, MFs at 12% will come out higher even with this strategy for an investment period more than 25 years.

You should seek clarity about the goal of your investment before proceeding with NPS. Or any investment for that matter. If your goal was to save taxes with NPS, you will succeed in the short term since no one can give you 31.2% returns in a year. If you want to have a long term slightly risk averse investment, NPS is still a good option for growth. If you are an aggressive investor and don't mind the risks with 100% equity for (really) long term, Equity is the way to go and NPS will not suit your needs.

Avg NPS XIRR for SIP model over last 2 yrs is 14% and. standard MFs is similar.. so how why are the assumptions that NPS is lower.. it is finally still going into equity? NPS is an MF.. just has a lock in for tier 1 and with a specific purpose of retirement planning.. Cannot be used as a normal investment plan and be compared.. Compare exit/ entry & TERs for MFs with NPS chgs and the tax treatment for corporate nps.. its way way ahead of MFs..

 

[curios_mind_huh]

Avg NPS XIRR for SIP model over last 2 yrs is 14% and. standard MFs is similar.. so how why are the assumptions that NPS is lower.. it is finally still going into equity? NPS is an MF.. just has a lock in for tier 1 and with a specific purpose of retirement planning.. Cannot be used as a normal investment plan and be compared.. Compare exit/ entry & TERs for MFs with NPS chgs and the tax treatment for corporate nps.. its way way ahead of MFs..

NPS cannot beat Index MF returns at any given point of time. All the AMCs under NPS invest heavily in Large Caps with focus on not losing money as the first priority. Even if I consider NPS to give 14% long term, Equity Index funds would have at least a 2% delta over it.

Like I said, Equity MFs and NPS are intended for different purposes. But if the goal is to accumulate wealth till the age of 60 and risk of 100% Equity isn't an issue, I don't see why both MFs and NPS should not be considered. I compared Expense Ratio, Exit Load, Capital Gains for Equity MFs and 31.2% tax discount on NPS over a period of 30 years before coming to the conclusion.

 

[panchabhut]

1. NPS has the lowest expense ratio of all MF. There is no exit load etc for NPS. This factor does not seem to have been considered.
2. I am invested in NPS for the last 8 years, with avr Equity ratio of 50%. My cumulative IRR on gross value (before considering tax benefit) is about 17% and effective IRR (after adjusting for tax exemption) is around 24%. However, I have leveraged the switch option, making the most of pre covid dip and post covid rise in equity markets. Even without that, the avr IRR is around 14% and tax benefit adjusted IRR is about 19%
3. However, old tax regime is only beneficial if someone has taken housing loan or plans to take one in near future.
4. NPS is a combination of 3 MF, Equity MF, Corporate Debt MF & Govt Debt MF. Each type has their own merits & demerits but with NPS, you get the balance of all 3. And based on market perception, one can switch the ratio between them at the cost of just Rs.25. If you are investing in 3 MF separately, every time you switch, you end up paying LTCG, but for NPS no tax is payable for switching from equity to debt or from debt to equity within the NPS. So, if you believe that markets are expected to saturate or fall, you can easily reduce the equity share and the accrued gains would be finalised and shifted to debt for just Rs.25. Again, if you believe that markets will rise, you can swithc from debt to equity same way.
5. NPS is for the future. The fund requirement to maintain the same lifestyle roughly doubles every 7-8 years. So if someone is 30 yr old and spending 50K a month today they will need 8 Lakh / mth to maintain the same lifestyle by the time they turn 60. NPS is for this purpose. Further, the rate of return of NPS far exceed the Annuity factor. That why, instead of going for 60% direct withdrawal, it is better to opt for SWP in NPS at the time of exit, where 40% is converted to annuity and the remaining 60% remains in NPS and a fixed sum is withdrawn from that every month (in addition to annuity).
6. In older times people used to work for whole life and then buy a house or do other things that require large investments. Now the trend is reverse. People buy first and pay EMI. So by the time they are 60, all EMI are paid off and they do not really need large sum of money at one time and rather need steady flow of money every mth to pay for their daily expenses and medical costs (main exp after 60).
7. 50K a year translates to little more than 4K/mth. The remaining amount can be easily invested in other forms. However, personally I feel that at least 15% of mthly net salary should be invested in NPS from the age of 25, to enable a steady mthly inflow after the age of 60.