In addition to Rs.1.50 lakhs investments where one can claim tax exemption, one can also opt for an additional Rs.50,000 exemption by investing in NPS.
Should this investment be made to take the tax exemption? Is it worth investing?
This 50K additional investment will save a person (in the 30% slab of taxes) Rs.15000 plus cess, which amounts to Rs.15,400 of tax savings. NPS returns in Tier I in the last year was a little less than 8%, in the same period SENSEX returns was 19.50% & well managed Mutual Funds made an average return of 24%.
Management fee in NPS is low at 0.01%, which many in the media talk as a positive. Where a mutual fund charges about 2% for fund management. Just to save management fee, if NPS is taken, the returns that gets foregone is more than 3 times.
This is a product that is taken for long term, it is a locked product too, where up to the age of 60, one cannot withdraw any funds from the investment. At 60, only 60% is available for drawing & the balance gets moved to annuity which is paid at 8.25%.
Instead of investing in NPS, if the amount is set aside after paying taxes, which is Rs.35K per year. For a 30 year old person, investing for 30 years will generate Rs.2.07 crores of wealth. While the same if invested in NPS will generate only Rs.61.84 lakhs.
The only requirement to have this amazing wealth accumulation is the discipline. Pay15K taxes and set aside a SIP of 3000 in a well-managed diversified fund. Need not worry about management fees, fund managers provide a huge value add for the fee they charge.
Equity exposure in NPS is likely to be raised to 75%, yet without active management, there is less potential for a great value add. And since the investment is made for a longer period, need not worry about risk, you are investing into the economy and so long you believe that India will be growing, your investment too will be growing.