NPS can save you additional tax, and more

To NPS, or not to NPS, that is the burning question.

On one hand, you have the National Pension Scheme (NPS) for those in the old tax regime. It can help you grow your money as well as save additional tax by investing Rs 50,000 in it.

On the other hand is a school of thought that advocates equity mutual funds for the long term instead.

They have a valid reason, too, especially if you are in your 20s to mid-30s and an aggressive investor: NPS doesn't allow you to invest more than 75 per cent of your money in equity. The rest is put in a rather conservative fixed-income option. Although a 75:25 split in equity and debt is a healthy asset allocation, your money may not grow as fast compared to a 100 per cent-equity portfolio in the long run.

Given this dilemma and the hordes of questions sent by you, we decided to rely on cold, hard data to give you a precise answer.

The verdict

Assuming you started investing Rs 50,000 separately in the NPS and a Sensex-tracking index fund roughly 25 years back (October 1, 1998), the table will show how your money would grow:

Note: This is for old tax regime individuals only. Additionally, the NPS returns are available from July 2009. Before that, we considered a mix of 75 per cent Sensex returns and 25 per cent Gilt fund returns.

• If you are in the 30 per cent tax bracket (if you earn a total income of over Rs 10 lakh per year), NPS would be the better option.
  
• But if you are in the 10 or 20 per cent tax bracket, investing in the Sensex-based index fund would be the ideal choice.

What you should do

The above table gives you a decisive answer.

That said, even for those in the 10 to 20 per cent tax bracket, the NPS can be your investment of choice if you are a spendthrift and need more self-control when it comes to money.

Since NPS doesn't usually allow you to withdraw money before the age of 60 - you can redeem only a quarter of your money under specific circumstances - it instils discipline and helps you build a sizable retirement kitty in the long run.

To know more about NPS and the best NPS fund, we invite you to refer to our comprehensive article on NPS: Which NPS fund should I invest in?

Final thought

To conclude, there is no one-size-fits-all answer. Your tax bracket and investment discipline will play a key role for you to secure your financial future.

Check out our NPS fund performance tool.