NPS calculations: Is NPS a good option or not under current rules.

[isika]

There was a recent thread where everyone was debating whether NPS tier 1 is a good option vs putting the same amount in equity, so I did some calculations and wanted to take feedback from the community. The calculation is being done with several assumptions:

Equity returns: 12%

Debt Returns: 7%

Nps return(75 equity/25 debt): 10.75%

Years till retirement: 30( currently aged 25)

Tax rate : 30%

Inflation : 7%

Annuity rate: 8%(https://cra-nsdl.com/CRAOnline/aspQuote.html) This varies depending on your age, 7.5 to 8.3 is what I found for 55 year old available today with no return of capital)

Putting 4166 SIP(50k annually) in NPS at 10.75% for 30 years: 
Lumpsum: 67L
Annuity: 44.67L

Since for equity, you will have to pay 30% tax first, you can only have a sip of 2166 per month.

Putting 2916 SIP in equity at 12% for 30 years:
Pre tax return: 1.03 cr    
Post 10% LTCG: 93.7L

Now comparing annuity with lumpsum is hard because everyone will have different risk appetite at 55 year of age, so I am converting this into a subjective question with post inflation values after 30 years

Suppose you, after your retirement, are offered the following(adjusting above values for inflation):

• 8.8 L lumpsum with 3.9k monthly pension(which reduces by 7% evey year) untill your death
• 12.31 Lakh lumpsum today.

I have not taken several things into picture, like liquidity issue in NPS, high risk of holding corpus in equity till your retirement, returns of NPS and equitu varying more because of choice of stocks etc.

Using the same calculation bt different ages:

Year till retirement: 25

• 7.01 L lumpsum with 3.1k monthly pension
• 9.33L lumpsum

Year till retirement: 20

• 5.46 L with 2.4k pension
• 6.95 L lumpsum

Year till retirement: 15

• 4.06L with 1.8k pension
• 4.99L lumpsum

Year till retirement : 10

• 2.74L lumpsum with 1.2k pension
• 3.28 L lumpsum

Year till retirement 5

• 1.42 L lumpsum with 600 pension
• 1.66 L lumpsum

Conclusion: As expected , NPS start making more and more sense the closer you are to your retirement, as the extra interest percentage in direct equity don't get much time to compensate for the extra principal due to 30% tax deduction. At 30 years far also, you are getting a pretty good annuity if you consider the difference b/w the lumpsums

Excel Calculator for simulation: https://docs.google.com/spreadsheets/d/1ajoOVOYR0aBdu2BIefZVYew2c939ropn

 

[followtheshepherd]

@isika I did a calculation yesterday for this to understand. Let's take 100% corpus which would be generated if we assume 10% for NPS and 12% for Index fund for over 30yrs. The return difference was negligible (this is after taking lower SIP amount for index as you have taken it yourself in your calculations). NPS had IIRC, 1-2L more return on the entire 100% corpus vs post tax index fund return.

Not saying 1-2L is insignificant, but considering you'd be given the entire corpus at retirement with index plus liquidity, makes NPS's value less in my mind.

Open to counter argument of this or any error in calculations on my part.

 

[cjs17]

@followtheshepherd Why 2% difference, nps also invests in equity right

 

[followtheshepherd]

@cjs17 The calculator I used online didn't have an option to put decimal point. I'll see if I can get it with another calc. You can try it with it 10.75% and check the amount.
Edit: the difference is over 17L. Interesting. Now, it's upto individual choice, I suppose. If we get more math calculations, I think it'll come down to time value of money which might put index ahead. If your sole purpose is to generate a pension income, it'll make sense with NPS. If you think you would be able to make better use with the full corpus, then NPS wouldn't make a lot of sense probably.

 

[isika]

@followtheshepherd Can you tell me your years left till reitrement. I can give you a full picture od what everything will come up as

 

[isika]

@cjs17 Knly upto 75%of your investment. Thats why I took 10.75% in my calculation also

 

[isika]

@followtheshepherd What was the investment period?

 

[isika]

@followtheshepherd I don't think there will be 1 2 l difference. NPS goes miles ahead because of the excemption

 

[followtheshepherd]

@isika 30yrs investment period. The difference is because I assumed 10% NPS returns. Have taken 10.75% as well in the same thread. Difference then is a little over 17L.

 

[isika]

@followtheshepherd Including 7 % inflation, you will get 8.8 lakhs with 3.4k monthly pension from NPS.

If all equity you will get 12 Lakh.

These are the assumptions taken.

Annuity Rate 7.00%
Equity 12.00%
Debt 7.00%
NPS equity allocation 75.00%
Inflation 7.00%
Annual Contribution 50000

Years till retirement 30
Tax rate 31.40%
LTCG 10.00%

NPS IRR 10.75%

 

[kiddoleknocker]

@isika You have not considered two factors here -

1) Tax saved through corporate contribution. This is particularly useful when you are in the highest bracket and have exhausted all other tax saving avenues.
2) Additional voluntary contribution through 80CCD(1B). Provides additional 50K exemption.

 

[zaplecza]

@kiddoleknocker

Additional voluntary contribution through 80CCD(1B). Provides additional 50K exemption.

This is what the post was about actually. That's why OP has taken lower contribution for index vs NPS (30% lower). Also, it's taken for the highest tax slab.

 

[kiddoleknocker]

@zaplecza He's missing the exemption one gets through the company's contribution as this is not factored into CTC and is thereby exempt from taxation. You can choose to have 10% of basic + voluntary contribution.

 

[isika]

@kiddoleknocker That will still not change the overall point, as instead of gettin 50k exempted you can get 100k exempted. Percentage wise, the post retirement ratio of annuity in NPS vs extra lumosum in MF will remain the same

 

[zaplecza]

@kiddoleknocker I replied to your point second point. First point is valid, that's not considered. I don't think everyone has the option to opt for that though, right?

 

[kiddoleknocker]

@zaplecza Many companies support the corporate scheme. They just have to link up with the POPs. It has been live since 11 years now.

 

[isika]

@kiddoleknocker My comoany doesn't have that option,because of which I wasn't even aware of that

 

[zaplecza]

@kiddoleknocker Will check with mine. Don't think they do. Can you tell me, what exactly should I ask the HR?

 

[kiddoleknocker]

@zaplecza Just ask if they support corporate NPS. If they do, they will either offer to open the account for you or ask you to open a standard NPS account (your bank will do this) and provide the number to them for conversion.

 

[1008]

@kiddoleknocker Will be better to directly open NPS account with the POP your company uses or use eNPS its completely online and charges are less than using Bank as POP.

eNPS is for those who only want to invest their 50k and not through corporate. Account will be instantly opened with aadhar and you will get your pran number.