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
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%. Itmight (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![Smile :) :)](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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
- Invest 10,000 via corporate NPS contribution (Tax free) or
- Invest 6,880 in Index mutual fund after taxes (31.2% deducted incl. Cess)
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
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