Unlocking Wealth: Corporate Employees’ NPS Investments Pave the Way for a Secure Retirement

Pune, 17 Febuary 2024: In a significant endeavor to provide financial security in retirement to private company employees, the Indian government had expanded the scope of the National Pension Scheme (NPS). This move aims to address the retirement concerns faced by individuals working in the private sector and foster a culture of long-term savings with tax benefit.

Private sector employees now have the opportunity to save tax also by investing in the NPS through two ways:

Self-Investment under Subsection 80CCD(1B): Employees can invest up to Rs. 50,000 in the NPS from their own funds and avail tax exemptions under 80CCD(1B) subsection.

Employer Contribution under Subsection 80CCD(2): Employer can contribute 10% of the employee’s basic salary to the NPS on their behalf, allowing employees to enjoy tax benefits under 80CCD(2) subsection.

Let`s say, an individual invests Rs. 50,000 in the NPS through self-investment and an additional Rs. 2 lakhs from their employer’s contribution, the entire amount becomes tax-exempted. Conversely, without investing in the NPS, individuals would need to pay taxes on this amount, resulting in a reduced post-tax income 1.75L (assuming a 30% tax bracket, the post-tax amount of 2.5L would be Rs. 1.75L).

To compare the returns of NPS with other investment avenues, let’s consider a scenario where if the an individual invests the post-tax amount of Rs. 1.75 lakh per year in mutual funds, assuming a 12% return, the accumulated amount at the end of the 25th year would be approximately 2.6 crore. Similarly, investing the post-tax amount in the Voluntary Provident Fund (VPF), assuming an 8.15% return, would yield only 1.4 crore at the end of the 25th year. In contrast, if an individual invests 2.5 lakh per year in the NPS for 25 years, assuming a 10% return. At the end of the 25th year, the individual would accumulate approximately Rs. 2.7 crore.

The table below summarizes the investment and return details:

It is essential to note that upon maturity, NPS holders receive 60% of the accumulated amount as a lump sum, which is tax-exempted, while the remaining 40% needs to be converted into an annuity. The returns on mutual funds are subject to a LTCG tax, and the VPF also has separate tax implications.
The expansion of the National Pension Scheme to private sector employees provides an avenue for individuals to unlock wealth and secure their retirement. By taking advantage of the tax benefits offered by the NPS and comparing the returns with other investment options, corporate employees can make informed decisions to build a financially resilient future.

About Author:
Hradayesh Pathak holds an MBA in finance from XLRI Jamshedpur and has successfully passed CFA