NPS - Is it a good choice? (If liquidity is not an issue)

[giobob]

Hi All,

As I have seen in this forum, there is very strong opinions about NPS on both sides. Most of the concerns about this product is related to the liquidity & annuity part. I am trying to understand is there any specific use cases where this product can be viable (Possibly better) than the alternatives, Or should we close the door and move on from NPS for once and all.

Let's say Mr.X is 30 yr old & earns quite well (in 30% tax bracket) & invest 75% of In hand salary. Mr. X has over 70% liquidity in his retirement portfolio (So liquidity is not of concern to him). He is planning to work till 45 & after Coast FI till 60 when he takes full on retirement.

He is provided with 2 options

1. Invest 10,000 via corporate NPS contribution (Tax free) or
2. Invest 6,880 in Index mutual fund after taxes (31.2% deducted incl. Cess)

Investment Assumptions

Return from Equity = 10%

Return from Debt = 7%

Aspects
Option 1 (NPS)
Option 2 (Index fund)

Risk profile
60% - Equity, 40% - Debt
100% Equity

Expected Return
(.6 * 10) + (.4 * 7) = 8.8%
10%

Investment Contribution Tenure
15 Years (Age 45)
15 Years (Age 45)

Withdrawal
30 Years (Age 60)
30 Years (Age 60)

Contribution/Month (Rs)
10,000
6,880

Step Up
7%
7%

Final Corpus After 30 Yrs
194.15 Lakhs (116.49 Lakh Cash + 77.66 Annuity)
171.86 Lakhs

Final Corpus After Tax
194.15 Lakhs (116.49 Lakh Cash + 77.66 Annuity)
156.75 Lakhs

After removing 116.49L from both sides
77.66 Lakhs in Annuity
40.26 Lakhs Cash in Hand

Mr.X is aware that Annuities are not tax efficient plus they have low returns, but they do provide income flooring at old age. Currently Annuities return a little over 5%. It might (will) get lower in the future, so does all other fixed income instruments.

By using 5% return, 77.66 L annuity generates 3.88L annual return. In order to earn it from the 40.26 L corpus, it needs to return 9.6% (Almost twice that of Annuity return)

Also NPS achieved this corpus with Lower risk (beta) than the index funds, due to the 40% debt exposure.

IS NPS justified in this case.?

This thought was running in my mind for a while. I thought of discussing it in the forum (Since most of us here are in 30% bracket & has enough liquidity), so that i can get different perspectives & people can point out something I cannot see.

PSA

To All the NPS Lovers

Intention of this post is not to say NPS is good, All of us should invest in it. This is a very Specific case & assumption has been made that Mr.X has other investments, through which he has sufficient liquidity.

To All NPS Deniers

I would like to understand what is keeping you from NPS, other than liquidity & annuity clause. In the provided example, I took some assumptions in favor of NPS (Person has good liquidity & in 30% bracket). But is there due to some other reason you are averse to this product?

Looking to have a fruitful discussion

 

[elgato]

@giobob Personally, I do 50k a year because of the tax break. Without the tax break it doesn't make sense. I'd just SIP into MFs.

 

[belov]

@elgato Corporate NPS upto 7.5L can be tax free.. Obviously that's quite high.. But since my employer is enrolled in corporate NPS.. I can save above 50k..

 

[fishyjoe]

@belov Does the employer contribute extra money like in the case of EPF?

 

[ajgray71]

@fishyjoe No, it goes from your paycheck but through employer. Only benefit is, it is taxfree.

 

[stellasam]

@elgato Exactly. PF is for tax benefits, there are many assests with better returns if it's not for Taxes.

 

[summer010]

@elgato You can further contribute upto 10% of your basic salary and that contribution is also tax-exempt beyond 80c and 80ccd.

 

[fishyjoe]

@summer010 This has to be done by the employer though. You can't voluntarily do it and claim.

 

[larryyt]

@fishyjoe I think companies provide that option to choose. My company does.

 

[fishyjoe]

@larryyt Yeah. It's voluntarily. But the company should support it. You can't put 10% or whatever % of your basic in NPS and claim a tax break.

 

[summer010]

@fishyjoe My company allows me to choose 0-10% of basic for employer contribution.

 

[josh261995]

@elgato Do you just lumpsum the 50k every year? Or is it a sip route?

 

[elgato]

@josh261995 Lumpsum 50k on the 1st of April

 

[sophiejko]

@elgato Why not ELSS though?

 

[giobob]

@sophiejko ELSS comes under 80C. NPS has exemption over and above 1.5 L from 80C. (50k personal contribution & 10% employer contribution)

 

[elgato]

@giobob That's correct. I do both ELSS 1.5L + NPS 50K.

 

[johntx]

@elgato How are you able to invest 1.5L in elss for tax savings purposes? You must be having an EPF component, right?

 

[brokeninsd]

@giobob I was comparing the typical choice of "take NPS and save tax" or "pay tax and invest rest in Equity MFs".

I considered 4 variables
1. NPS returns
2. Excess returns in MFs compared to NPS (despite the lower expense ratio, even pure equity returns are lower in NPS)

1. Starting age
2. Expected living age

For 9% NPS returns, 1.5% extra in MFs, starting age at 35, and living till 80, NPS is better by 5%.

My analysis is here .. https://mymoneytales.wordpress.com/2021/05/11/nps-saves-additional-15k-yr-to-take-or-not/

It has an Google Sheet model u can try playing with.

Takeaway: if in 30% tax bracket, AND below 35, AND have no liquidity issues, go for the 50k/yr NPS.

 

[stanjz]

@brokeninsd You did not consider Tax on annuity - considering that NPS is 1% better if you fall under 10% tax bracket, -1% & -4% in 20% & 30% tax bracket respectively assuming tax %age remains same.

 

[brokeninsd]

@stanjz I didn't even go to the annuity part. Coz the options are too many, coupled with probability. Just corpus vs corpus.
Thanks for the adition though.