NPS Should you invest for the additional tax benefit?
/2015-08-11 10:11:25
Shantala Kumble

Ever since Arun Jaitley announced the additional tax deduction of Rs. 50,000 for the NPS in this year’s budget, investors have warmed towards it. But is it worth investing in the NPS in the long term just to capitalise on the additional tax saving? Let’s find out.

Imagine a 35 year old investor who falls under the 30% tax slab. With the added benefit, he’s looking to save Rs.15,000 in taxes every year. Since the allowable limit under the new Section 80CCD (1b) is Rs. 50,000 , let us invest that along with any tax savings and compare. If the money wasn’t being invested into the NPS, where would he invest it? Probably into a diversified equity mutual fund.

So let’s consider the following scenario –

ParticularsYearly Investment AmountExpected ReturnYears to retirementPost tax value of investment
on retirement
Annuity
Requirement
NPS65,00010.50%2564,20,000Yes
Equity MF50,00012.00%2578,28,500No

For the NPS, due to the mandatory purchase of an annuity with the final corpus, the amount that is actually available to him post tax falls to a mere Rs.32,88,400 when compared to the tax free availability of Rs.78,28,500.

Let’s try and level the playing field between these two options on retirement. Assuming he decides to pull out a similar lump sum from his equity mutual fund and invest it in a product that will fetch him a certain level of annual income. With the investment options available to him, he could do well to better a 5% annuity return. Let’s consider a scenario again.

ParticularsExpected ReturnInvestment PeriodAnnual post tax
Income
Annuity5%152,08,000
Alternate Fund7%154,89,600

Think again now, would you invest into an NPS just to gain the benefit of Section 80CCD (1b) or would you rather invest into a diversified equity mutual fund!