1. For Information contact us at contact@wallsofindia.con or call us at 96504 59955
K2/1, FF, DLF Phase – II, Gurgaon – 122008, Haryana, India
Decoding the National Pension Scheme
This Budget the finance minister has provided additional cushion to the National Pension
Scheme (NPS) by giving additional deduction of Rs. 50000 u/s 80CCD to the individuals
investing into it.
Without going in its details, we wish to analyze is it really worthwhile to invest Rs. 1.5 lakhs in
NPS to get deduction u/s 80C and additional Rs. 50000 in the same to get deduction u/s 80 CCD.
The salient features of the NPS are minimum contribution of Rs 6000/-p.a. and money gets
locked till you turn 60yrs of age. At 60, you mandatorily have to transfer 40% of the corpus to
an Insurance company of your choice for managing the corpus who in turn will give you annuity
(pension). Remaining 60% can be taken as lump sum and both the lump sum as well as the
annuity will be TAXED on receipt.
The pension managers manage your money and you give an auto option which changes asset
classes upon your age. The maximum limit for the equity is 50% and rest as debt in the early
phases of life.
Our take is, if you wish to plan your retirement corpus at 60, the combination matrix has to
reflect your risk appetite. Our call is, it’s better for an individual to go for ELSS equity saving
with combination of PPF/PF.
The advantage of this is, firstly, you will be at liberty to proportionate your money b/w debt and
equity and taking a call for more than 50% in equity, which NPS doesn’t allow.
Secondly, the liquidity crunch, NPS blocks your money till you attain 60, on the other hand ELSS
frees up your capital in three years of time.
Thirdly, in case of NPS the investment is made in only Nifty (50 stocks) and Sensex (30 stocks)
which limits the Alpha (extra return) which can be created by investing in an ELSS scheme,
where there is no such boundation.
Last, the main quotient, the TAXATION part ,while ELSS and PPF is completely tax free for the
investors, NPS taxes you at the time of retirement on your taxed capital.
We completely rule out exhausting your Rs1.5 lakhs exemption u/s 80 C in the NPS scheme as
there are better to go with ELSS and PPF/PF combination.

2. For Information contact us at contact@wallsofindia.con or call us at 96504 59955
K2/1, FF, DLF Phase – II, Gurgaon – 122008, Haryana, India
Now the additional benefit part of Rs. 50000. Let’s take an example to understand.
1. A 25 year old professional earning 7.25 lakhs per annum. So if he doesn’t claim the
additional benefit provided by the Finance Minister, he pays 10% i.e. 5000 rupees
additional tax every year after adjusting for deductions and exemptions on the income.
On the other side he has the option to invest in NPS and save tax. Let’s see which one is
better.
Particulars
Invested in Blue Chip
fund
Invested in NPS (50% -
50% equity and debt)
Amount Rs. 45,000 Rs. 50,000
Tentative growth 13% * 11% **
Tenure 35 35
Amount at 60 Rs. 3.14 crore Rs.2.11 crore
After Tax *** Rs. 3.14 crore ~Rs.1.95 crore
* Conservative CAGR expectation of 13% of index (though in past index has given around 15% CAGR return over long term and Blue
Chip Mutual Funds have further beaten the index by another 2-6%)
** Bond returns are expected to be at around 9% hence 50% (13%+9%) =11%
*** Calculated at a conservative rate of 10%
2. A 35 year old professional earning 12 lakhs per annum and subject to 20% bracket after
the deductions and exemptions, he contributes roughly Rs.40, 000 every year to the
Blue Chip fund. Let’s see which one is better.
Particulars
Invested in Blue Chip
fund
Invested in NPS (50% -
50% equity and debt)
Amount -Rs. 40,000 -Rs. 50,000
Tentative growth 13% 11%
Tenure 25 25
Amount at 60 Rs. 80 lakhs Rs.71 lakhs
After Tax Rs.80 lakhs ~Rs.66 lakhs
3. A 45 year old professional earning more than 20 lakhs per annum and subject to 30%
bracket, will have roughly Rs. 35, 000 every year to invest. Let’s see.

3. For Information contact us at contact@wallsofindia.con or call us at 96504 59955
K2/1, FF, DLF Phase – II, Gurgaon – 122008, Haryana, India
Particulars
Invested in Blue Chip
fund
Invested in NPS (50% -
50% equity and debt)
Amount -Rs. 35,000 -Rs. 50,000
Tentative growth 13% 11%
Tenure 15 15
Amount at 60 Rs.18.45 lakhs Rs.21.75 lakhs
After Tax Rs.18.45lakhs ~Rs.20.5lakhs
Conclusion
1. We believe NPS structure is in early stage and needs consider revamping and alignment
on various issues such as taxation, greater autonomy in equity investments, getting
away with liquidity conundrum.
2. Young workforce (25 – 40) can opt out of the NPS, as they are better off by paying taxes
as per the current guidelines of the NPS. Any major change in the structure can force us
to relook out analysis and decide accordingly.
3. Professionals who are in their 40’s and highest tax bracket can look at investing in the
NPS, as it is beneficial in term of tax savings and also aligned well with its features,
though it losses sheen, when we consider the low payout one will get from insurance
companies as annuity (currently it is around 6.5% pretax).
4. A major point in the NPS structure is that it’s a tax deferral plan where one has to pay
taxes when he retires. Also one should not solely invest in NPS as only a tax break, but
consider it as a part of wealth accumulation plan that will reap benefits in retirement
days where it doesn’t score well as compared to the other options available.
5. Moreover, we have assumed 10% taxation on 2/3rd
of the corpus which is far more
conservative estimation as current rule says taxation to be slab rate when you attain 60
and we believe will be aligned with our assumption.
We don’t rule out the credibility of NPS, but limitations and tax anomaly, don’t let us to put our
weight behind it. You can choose to give it a pass as it will unnecessarily create clutter in your
portfolio with no real benefit.