Dev Ashish

Even though NPS is a product designed exclusively for retirement planning, what attracts most people to NPS is Rs 50,000 extra tax benefit it offers via deduction.

As per the current tax rules (2019), there is an additional Rs 50,000 tax deduction available under Section 80CCD (1B) for NPS contributions made in NPS (Tier 1). This benefit is only available to NPS subscribers and most importantly, is available in addition to the Rs 1.5 lac deduction available under Section 80C.

And this extra Rs 50,000 tax deduction for National Pension Scheme NPS is what catches most people’s interest. And such people keep looking for easy-to-use NPS calculators.

But before we find out the details of NPS pension calculations, let me remind here that ideally, investment decisions should be governed by real financial goals and not tax-saving alone (read why?). But most people ignore this important advice and get attracted / give undue importance to things like tax-saving. But let’s not get into that discussion today.

To summarize the tax angle of NPS, investments of up to Rs 50,000 in NPS Tier I account in a financial year qualify for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This is in addition to the Rs 1.5 lac deduction available via Section 80C.

Now as mentioned earlier, this extra 50,000 NPS tax benefits attracts many.

And I regularly get queries from people, which are broadly like:

“I already utilize my Section 80C limit of Rs 1.5 lac using EPF, PPF vs ELSS, Home Loan EMI Principal repayments, etc. But I want to save more tax. So can I also use NPS for extra tax savings? And if I do, what would be my final retirement corpus and pension if I put just the additional Rs 50,000 every year in NPS?”

Though suitability of NPS for retirement planning is something worth debating, let’s just limit the scope of this article to answer the question below:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we run the numbers and kind of simulate the NPS Pension Calculator, we need to understand the latest NPS withdrawal rules (2019):

• Minimum 40% of the NPS maturity proceeds (corpus) must be used to purchase an annuity plan. This 40% isn’t taxed. But, the income (or pension) generated from the annuity will be taxed at the then tax slab rate of the retiree.
• The remaining 60% is exempt from tax and can be withdrawn as lumpsum.
• If they want, then NPS retirees can use more than 40% (up to 100%) of the NPS corpus to purchase the annuity. In that case, the lumpsum available will decrease accordingly. For example – one may choose to purchase the annuity plan using 65% of the NPS corpus on retirement (instead of the required minimum of 40%). He will then only get remaining 35% as a one-time lumpsum tax-free payout.

So according to NPS rules, basically, there is no tax at the time of withdrawal at retirement as i) 40% goes towards annuity purchase tax-free and ii) remaining 60% is paid out immediately as a tax-free amount. The only time any tax has to be paid is on the income being generated from the annuity in later years.

That was about NPS income tax benefits, NPS tax saving and NPS tax exemption. Now let’s come back to the question at hand:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we do NPS calculations for 2019, let’s make a few assumptions:

• NPS Starting Age – 25 / 30 / 35 / 40
• Retirement Age – 60
• Investment Tenure – 35 / 30 / 25 / 20 years (as starting age is different but retirement fixed at 60)
• Annual NPS investment – Rs 50,000 only
• Does investment amount increase every year – No
• Expected Returns – 10% (assuming a balanced mix of equity and debt)
• Part of corpus used for Annuity purchase on retirement – 40%
• Part of corpus used for Lumpsum Payout – 60%
• Annuity Rate at time of retirement – 6%

So here are the results of calculating NPS maturity calculator and pension:

Start at 25 and Retire at 60 (35 years tenure)

• Total Contribution – Rs 17.5 lac
• Total NPS Corpus – Rs 1.49 crore
• 40% used for Annuity Purchase – Rs 59.6 lac
• 60% Lumpsum Tax Free Payout – Rs 89.4 lac
• Monthly Pension from Annuity – Rs 29-30,000 per month (before taxes)

Start at 30 and Retire at 60 (30 years tenure)

• Total Contribution – Rs 15.0 lac
• Total NPS Corpus – Rs 90.5 lac
• 40% used for Annuity Purchase – Rs 36.2 lac
• 60% Lumpsum Tax Free Payout – Rs 54.3 lac
• Monthly Pension from Annuity – Rs 18,000 per month (before taxes)

Start at 35 and Retire at 60 (25 years tenure)

• Total Contribution – Rs 12.5 lac
• Total NPS Corpus – Rs 54.1 lac
• 40% used for Annuity Purchase – Rs 21.6 lac
• 60% Lumpsum Tax Free Payout – 5 lac
• Monthly Pension from Annuity – Rs 10-11,000 per month (before taxes)

Start at 40 and Retire at 60 (20 years tenure)

• Total Contribution – Rs 10.0 lac
• Total NPS Corpus – Rs 31.5 lac
• 40% used for Annuity Purchase – Rs 12.6 lac
• 60% Lumpsum Tax Free Payout – Rs 18.9 lac
• Monthly Pension from Annuity – Rs 6300 per month (before taxes)

Note – These numbers are indicative, based on an assumed constant average rate of return of 10% and annuity rate of 6% (which may not actually remain constant). The actual returns, final NPS pension, final lump sum amount one gets from NPS may be higher or lower. Also, you never know whether the 80CCD deductions will remain until your retirement or not.

And it’s pretty obvious that to make the most of the NPS (like in many other long term investment product too), the subscriber should ideally start investing as early as possible. And if one increases the annual (or monthly) contribution towards NPS every year (in line with the increase in income), then that would make the final NPS Retirement Corpus even bigger.

So now you have your answers to questions like what would be final NPS retirement corpus and monthly pension (income) in retirement years.

By the way, many people do compare NPS with PPF. But PPF is a pure debt product which too can be used to achieve goals like PPF crorepati if nothing else. But jokes apart, NPS is a hybrid equity-debt product and PPF is pure debt. So ideally, they shouldn’t be compared. Read more about PPF here and if you want, try your hands at this PPF calculator as well.

All said and done, National Pension System or NPS is designed to save for the post-retirement years, by making contributions during the working years. But is it the best-suited product for retirement saving or not? The answer isn’t that easy.

It may be suitable for some people and it may not be suitable for many others.

Many people’s retirement plans are best served via simple SIP in Equity Funds, regular EPF contributions and occasional Debt Funds (for rebalancing, etc.). And if the money being saved monthly towards retirement is high, then Rs 50,000 NPS tax rebate doesn’t seem that attractive for them.

Like a true retirement product, NPS is very illiquid and it’s difficult to take out money before you turn 60 (i.e., retirement age). So for those planning early retirement, it might not be the best option. More so because if you quit NPS before turning 60, then the NPS Rule’s original condition of using 40% corpus for annuity purchase changes to 80 percent! That is, you would compulsorily need to purchase an annuity plan using 80% of your NPS savings. And only the remaining 20% will be paid as a one-time payout. That’s kind of unfair to early retirees!

So no doubt the 80CCD deduction gives you additional tax benefits for investing Rs 50,000 in NPS National Pension Scheme. But NPS tax benefit and tax saving are one thing and product suitability is another. And whether NPS is actually suitable for you as a retirement savings product or not – is another matter altogether.

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I still get queries from readers asking that does it actually make sense to switch their mutual fund investments from regular plans to direct plans.

The simple answer is Yes.

And I also tell them that since direct plans of mutual funds have been in existence for several years (since 2013 to be exact), they are already late!

But jokes apart, let’s put some doubts to rest first.

Here are 3 important facts about Direct plans vs Regular plans:

1. Returns of direct plans will always be higher than regular plans of the same fund/scheme. That is, direct plans will always outperform the regular ones.
2. The NAV of Direct plan will always be higher than that of Regular plan of the same fund/scheme
3. Since the Direct-NAV is higher than Regular-NAV, you will get lesser no. of units for direct plans for the same amount invested. But still, your returns will be higher than those of regular plans.

There should be no doubt about these 3 things.

Under direct plans of the mutual fund schemes, you invest directly with the mutual fund house (AMC). And since there is no intermediary or distributor involved in between, the commissions are saved. And this reflects in the lower expense ratio of the direct plans – which in turn, reflects in better returns as compared to the regular plans. All else remains the same. The fund manager, the portfolio of stocks, everything remains the same.

Now let’s see how the returns of direct plans have fared since when they came into being (in early-2013).

I have chosen the Large-Cap Funds category (from SEBI-specified mutual fund categories) and taken the few popular and big funds as an example (and not as fund recommendations) here.

As you will see below, the Direct Plan of any chosen fund has given higher returns (or lower losses) in each year of existence when compared with the regular version:

And Direct Plans of MF giving Higher returns than Regular plans will continue to remain so in future as well as the expenses of direct plans will always be lower than the regular plans.

Lets now look at the NAVs of one (randomly chosen) fund to see how NAV changes over the years.

I chose HDFC Equity Fund as an example. As you can see below, the gap between the NAV of Direct Plan and Regular plans is increasing every year. And since the direct plan will give a higher return than regular plan every year, this gap will continue to increase further with each passing year:

Some people feel (and after being intentionally confused by regular-plan sellers like MF distributors, agents, banks which always sell regular plans) that Direct Plans are expensive than regular plans – after all, NAV of direct is higher.

But this is a wrong way of thinking. And the opposite is true.

No doubt, NAV of direct plans is and will always be higher than regular plans. But that is not because it’s expensive but because direct plans have a lower expense ratio which allows its NAV to grow faster. Hence, NAVs of direct plans are high and will continue to grow faster than regular plans.

You will get fewer units when you buy direct plans. But it comes with a faster-growing NAV. And this will give you better returns.

Let’s take 2 simple examples of why this is true and why direct plans can create more wealth than regular plans.

What would be the value of Rs 10 lac investment made one-time on 1^st January 2013 in HDFC Equity Fund’s Direct Plan and Regular plans separately?

Here is the answer:

As you can see, the value of investment made in direct plans is higher by almost 5% after just 6 years.

Now that was about lumpsum investment. But what about a Rs 25,000 monthly SIP in both Direct and Regular Plan of the same MF scheme?

Below is shown the value of the SIP between Jan-2013 and Jan-2019. The SIP is done monthly but data is shown only 6-monthly for making it concise:

Even though you got a lesser number of units in direct plans, you still ended up with a larger corpus at the end. And this is why the argument of you-get-lesser-units-in-direct-plan-so-its-expensive doesn’t stand.

Direct plans will give smaller no. of units but also (more importantly) give better returns than the regular plans.

By the way, if you feel that this % difference isn’t big, then remember that when you are investing in mutual funds, you are investing for the long term – like 10, 20 years or more (like in retirement).

And when that happens, this small difference every year builds up into a much larger difference. Because of compounding – which with each passing year, will grow and grow and convert this small percentage difference into a large absolute difference which you would not be able to ignore then after several years.

With that said, be reminded that Direct mutual funds will always (I repeat ALWAYS) outperform their regular plans of the same mutual fund scheme.

And despite their higher NAV, the Direct plans of Mutual Funds offer better returns than Regular plans.

If you are an investor who doesn’t want to lose out on these additional returns which are available for direct plan investors ‘only’, then you should switch to direct plans as soon as possible. But remember, it only makes sense for you to get into direct plans when you either know which mutual funds are good for you and your goals OR you are getting proper advice by a trustworthy and competent investment advisor.

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Many investors are angry. And many more are just plain disappointed.

And why not?

All those high returns that they came to identify equity with… are suddenly gone.

In fact, just in the recent past, things were so rosy. Isn’t it?

Have a look at the 2016-2017 period below – making money in equities was so easy then:

It wouldn’t be wrong to say that by the end of 2017, it seemed that a small section of investors (or let’s just call them market participants to avoid corrupting the word investor), started believing that high equity returns were their birthright! It’s like they started believing that equity is a fixed deposit that will give 15-20% returns every year! 😉

And if you were active on Twitter then, you would agree with me that it was so hilarious to see so many people (many famous PMS fund managers and others selling stock tip kind of s*** services) sharing the new highs their portfolios were making every day. It is understandable why they were doing it. The show-off was to attract new clients. But come on. It was so stupid!

ROFL 🙂 🙂 🙂 🙂

Without trying to say here that I got it right or something like that, it was clear by the end of 2017 that the party of 2017 was heading for a bad finish. And if you understand valuations and how it impacts future returns (this detailed study), then you too would have realized it.

Let’s move forward.

This is what has happened since January 2018. Have a look at the below table and graph:

Many of those angry investors are now sitting on large cuts in their portfolios and more sadly, with their confidence shattered. I do not want to blame them or anyone here. No point doing that.

And if we compare both the table together, it would be clear how dramatically the market returns have changed for those equity-cannot-fall believers.

The angry market participants need to realize that Equity is Equity for a reason. It is not a bank FD that will give you fixed straight-line returns. It will have good years (like 2016-17) and bad years (like 2018-19). You cannot avoid bad years (unless you are a perfect timer). This is how equity markets are structured. This volatility is a feature of the market and not a bug. This has remained for decades and will continue to remain in future decades too.

Understand it like this – Fixed Deposit is a safe asset. Right? And because it is safe, it gives constant but low returns. That is the cost of safety. But equity is a volatile asset. And because this volatility can be perceived as risky, it compensates this by giving comparatively higher average returns than FDs. Note that I used the term higher ‘average returns’. It means that where FD gives you 5-7% average annual returns, equity will give 12-15% average annual returns. But where things differ is that it will not give 12-15% every year. Some years you might get +40% and in other years you may get -17%. So a sequence of such up down years will be about 12-15%. Equity gives better average returns but not in a straight line.

I was reading a post by Safalniveshak (here) where he talks about value investing and says – Value investing doesn’t always work. The market doesn’t always agree with you…there are periods when it doesn’t work. And that is a very good thing.

I think this is a good reminder for equity investors in general.

When you begin investing, sooner or later, there will come a time when markets will not perform as you want them too. You may begin to feel that it isn’t working. But that doesn’t mean that it will never work again. It is how the markets are built. They will fall and they will rise. You might feel that it (equity investing) is ‘not working’. But remember that it works in the long term because it sometimes does not work (in the short term). And ‘not working sometimes’ is a feature and not a bug – and this is what most unsuccessful market participants fail to realize.

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This is the August 2019 update for the State of Indian Stock Markets. This update includes the historical analysis (since 1999, i.e. about 20+ years) and Heat Maps for the key ratios like P/E, P/BV ratios and Dividend Yield for Nifty50 and Nifty500.

A new section on the last 12 month’s index movements and PE dynamics during the said period has been added recently. This analysis will be done on a rolling basis. That is, it will include monthly analysis (for each of the last 12 months) as well as analysis for specific aggregate periods like the last 1 month, last 3 months and last 6 months. This is being done to highlight (if any) the changes which become evident in market sentiment from a data perspective.

Before we move forward, please remember a few things:

• The numbers shown in the analysis and tables below are averages of P/E, P/BV and Dividend Yield in each month (unless otherwise stated). Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.
• National Stock Exchange (NSE) publishes index level PE ratios based on standalone numbers and not consolidated numbers. It would be ideal to use consolidated numbers as many Nifty companies now have subsidiaries that have a significant impact on overall earning numbers. This has a much larger effect now than it would have had in yesteryears. And more importantly, this will matter more and more going forward. But NSE (as of now) continues to publish Nifty PE using its own set of criteria and decisions and sticks with standalone figures.
• It is possible that at times, some of the sectors in index get far more weight than is prudent to give. And its also possible that at the very same time, their earnings may be unexpectedly high or low. If and when this happens, the index level earnings will be impacted accordingly due to higher-than-necessary sector weight – which in turn may skew the PE data at that point of time.
• Similar to the point discussed above, it is also possible that at times, some (or few) individual index constituents might have high earning or market cap at an individual level(s) which might, to some extent, skew the PE data at the index level as well. The possibility of this happening is rare but still non-zero as the period under consideration is generally long term here.
• Caution – Never make any investment decision based on just one or two ‘average’ indicators (here’s Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

P/E Ratio (on the last day of August 2019): 27.27

And if we were to look at the movement of Nifty’s PE in the last 12 months, then here is a graph depicting the same:

Now, let’s have a more detailed look at how the last 12 months have panned out when it comes to Nifty movements and its implications (alongwith earnings’) on PE ratio of the index.

I suggest you spend some time on the table below (which shows month-wise data cuts) to gauge its importance in highlighting the trends in the last 1 year:

Now from month-wise depiction, let’s have a look at more aggregate time periods in the last few months. Let’s analyse the above-highlighted data points when period under consideration in aggregated to 3-months and 6 months (plus a 1-previous month for more comparative analysis):

Now with PE of Nifty50 analysed in various cuts, let’s move ahead to the analysis of P/BV and Dividend Yields of the Nifty50

Historical P/BV Ratios – Nifty 50

P/BV Ratio (on the last day of August 2019): 3.35

Historical Dividend Yield – Nifty 50

Dividend Yield (on the last day of August 2019): 1.39%

That was all about Nifty50 – the more popular bellwether index of India.

Now let’s do a historical analysis of the larger space, i.e. Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 96.1% of the free-float market capitalization of the stocks listed on NSE (March 2019). Nifty50, on the other hand, is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 66.8% of the free-float market capitalization of the NSE listed stocks (March 2019).

So obviously, Nifty500 is a much broader index than Nifty50.

So let’s see…

Historical P/E Ratios – Nifty 500

P/E Ratio (on the last day of August 2019): 29.19

Historical P/BV Ratios – Nifty 500

P/BV Ratio (on the last day of August 2019): 3.04

Historical Dividend Yield – Nifty 500

Dividend Yield (on the last day of August 2019): 1.33%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the actual investments have been made (at various P/E, P/BV and Dividend Yield levels), it is strongly suggested that this article may be read and referred to regularly:

• Nifty P/E Ratio Vs Returns Analysis (Updated 2019)

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