Is NPS worth the Hype?

[Narayana526]

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.

See, NPS started for Govt employees and extended the product outsiders.

So Govt always want to play safe and keep the invest universe limited for equity and with less AMC charges.
Please check my post for recent changes in NPS EQ securities universe.

 

[Deleted member 9785]

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

any tax liability/

 

[Ayush_]

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

Yes you are correct (additionaly, for HNI it will also include surcharge beyond tax + cess)

 

[Zacobite]

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.

If you insist 🙂 I will agree to disagree.. cheers

 

[infinia_finally]

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

Surcharge of 25% for income>2cr takes into 39% bracket
Similarly 15% surcharge above 1cr takes to 35.88% and 10% above 50L takes to 34.32%

 

[infinia_finally]

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.

View attachment 44507



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?

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


@infinia_finally

I compare it like this.
Let's assume you have emergency funds set aside.
Every month,
Savings = Gross income - Tax - Expenses
Everyone would have some asset allocation for investing the savings, depending upon risk profile. It could be debt heavy or equity heavy or real estate heavy (debating what is a good allocation is beyond scope of this discussion)

So you should keep same allocation for NPS investment (in E, C, D) as outside and compare returns.
For same allocation, you should get similar returns outside vs in NPS. One problem I see is NPS has limited choices in allocation and also in funds. So for aggressive profile investors, they won't find similar choices inside NPS as outside.

Now for income of 100, you invest entire 100 in NPS, vs somewhere in 61 (39% marginal tax) to 69 (31.2% marginal tax).
So when you compare to every 69 you invest outside, in NPS it would be equal to 100 already (100/69 ~ 45% gain at outset) to (100/61 ~ 64% gain at outset)

So if you are getting similar returns outside and inside, NPS is no-brainer.
But let's say you get 14% outside vs 12% in NPS, over 35 years, you get 86% more absolute gains with 14% vs 12%
But then there's tax on outside. So it becomes a complicated comparison.

The next debate is 40% of NPS needs to be converted to annuity. Annuity is taxable today, plus rates are low. But then I am assuming that if you retire at 60, even for your outside corpus, you would invest in a combination of real estate, debt, dividend stocks etc for regular passive income. Again a complicated comparison.

In summary, if I get immediate gains due to tax benefit, especially in 80CCD(2), then I just take it. Government rules change for taxation outside as well as for NPS. So can't predict.

Caveat: Employer contribution to PF + 80CCD(2) - when it exceeds 7.5L per annum, it gets taxed. So for high income, remember to not exceed that. I won't recommend locking money that has no tax benefit.

 

[MSDfan]

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.


View attachment 44511

Isn't 1.5 lacs the combined limit of 80C & 80CCD(1) ??

 

[panu24]

Isn't 1.5 lacs the combined limit of 80C & 80CCD(1) ??

Yes that is combined under 80c
Separate contribution is 80CCD(2)

 

[Karwaabhishek]

One thing to consider is discipline. People lack discipline. 30 years is very long time and with changing circumstances, people will flicker with their mutual funds and stocks portfolio, which will affect their portfolio returns, for better or for worse is subject to market conditions and timings.

Here you get instant tax savings and a disciplined retirement corpus. You will have a decent amount accumulated at the end of it. It might be small, but its constant income.

I treat it as debt portion for my asset allocation and continue to invest this small portion of my income as I lack discipline.

 

[Zacobite]

One thing to consider is discipline. People lack discipline. 30 years is very long time and with changing circumstances, people will flicker with their mutual funds and stocks portfolio, which will affect their portfolio returns, for better or for worse is subject to market conditions and timings.

Here you get instant tax savings and a disciplined retirement corpus. You will have a decent amount accumulated at the end of it. It might be small, but its constant income.

I treat it as debt portion for my asset allocation and continue to invest this small portion of my income as I lack discipline.

nps is a great option hands down...everyone should consider it.. earlier the better

 

[aayusharyan]

nps is a great option hands down...everyone should consider it.. earlier the better

If you have NPS, remember to try to fill that up early so you can maximize your returns.

 

[manikwalia]

The good thing about NPS is its lockin and not receiving the money so it is forced investment. Good for people who are not good with Finances... Have you calculated the tax on Annuity in your calculation? if not then post tax NPS would be lower

 

[moneyMaker]

Meh.. . .

 

[nayra]

NPS auto aggressive will consider equity till age 45 now, which is an improvement. Down the line it might get better or worse, I think just counting it as one investment in diversification might not be that bad, especially when you are getting tax benefits.

 

[Batman]

Found this thread today. Good discussion with different POVs.

For me, I think I'll continue with 0 NPS going ahead. I used to invest about 2.5-3L under the 50k + 10% method. This is good money and taxes saved is huge under 30% tax bracket. BUT the lock in period is too long, and flexibility to invest is low.
I have the confidence in investing and managing my own money.

That being said, IF my CTC ever crosses Crores, it wouldn't hurt to park a tiny bit of basic income under NPS. That's like pocket change for ultra emergency situations - if I end up like Schitt's Creek.