Myth busted: You do not get 30% returns by investing 50,000 in NPS!

Published: October 28, 2017 at 11:47 am

Last Updated on October 8, 2023 at 1:49 pm

You would be surprised as to how many people believe that by investing an additional 50,000 in NPS, they “instantly” get a return equal to their tax slab! This is a case of mis-accounting or innumeracy. In this post, I discuss what exactly is the implication of “saving tax” via investing in 80C and with the National Pension Scheme (NPS).

Announcement 1 : Gamechanger paperback is still available at a 25% discount for Rs. 149 only! Grab it or gift it to a young earner

Announcement 2: Swapnil Kendhe joins the freefincal List of Fee-only Financial Planners in India and Fee-only India: a movement to serve investors and advisors. He is one of the most level-headed advisors that I know. We share similar beliefs about risk and reward. You can reach him at

Tax Myth 1: Reduction in taxable income is not the same as a reduction in tax payable!

When we say, “Rs. 1.5 Lakh can be invested under 80C for saving tax”, many people interpret this as Rs. 1.5 Lakh of tax can be saved!!

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

What this actually means is that out of taxable income in any financial year, Rs. 1.5L can be deducted. This is, by investing Rs. 1.5 Lakh, we reduce our tax liability by 1,50,000 x tax slab(+cess).

If we ignore cesses, and if 12L is the total taxable income, then by investing 1.5L, the taxable income reduced to 10.5L and tax payable is reduced by 1.5L x30% = 45,000

Reduction in taxable income = amount invested.

Reduction in tax payable = amount invested x tax rate

They are not the same!

Tax Myth 2: No Instant returns on tax saving, just more money in hand

Update: kishanm pointed out that I had failed to used the slab configuration of taxation. So I have reworked the numbers below. The main conclusions remain unaffected.

I don’t know how this 30% return (for those in 30% slab) originates! It was so bizarre that I had a hard time arriving at that 30% figure.

Let us continue with the above example.

Taxable income = 15L

Tax to be paid: 2.625L  (12,500 in 5% slab + 1L in 20% slab + 1.5L in 30% slab; cess has been ignored uniformly)

Net income at hand: 12.375L

Hang on. I can save some tax.

I make an 80C investment  = 1.5L

Then the net taxable income = 13.5L

Tax to be paid =  2.175

Reduction in tax liability: 2.625L —-> 2.175L or 45,000 as mentioned above.

Extra cash in hand: 12.375L + 0.45L = 12.825L (this includes the 1.5L 80C investment)

Before 80C, tax removed (as a percentage of total income): 2.625L/15L = 17.50%

After 80C, tax removed(as a percentage of total income): 2.175L/15L = 14.50% = 2.175/(13.5L + 1.5L)

Notice that the effect of the 1.5L 80C “saving” is already accounted for in the numerator. The calculation ends here! The beenfits ends there!

The problem arises when I claim I got the  45,000 as a return on my investment of 1.5L, or read 45,000/1.5L = 30% “return”.

The correct equation that expresses the benefit is

(2.625L/15L) – (2.175L/15L) = (2.625-2.175)/15 = 0.45/15 = 3%

Tax saved = 3% of total income.

The mistake is using this incorrect equation is (2.625-2.175)/(15-13.5) = .45/1.5 = 30%

This is a case of “double counting”. That is investing 1.5L and saving 45,000 in tax are not independent events. I should use either the reduction in taxable income or reduction in tax for accounting. If I use both, it seems as I have got a return, “instant return” of 30%.

Remember that ice cream taxation meme? Photo by Marcin Kargol

Additional 50,000 “tax saving” with NPS

Now let us “carry on counting” (remember those movies?!) with additional 50,000 investment in NPS.

Note about NPS:

I cannot make my stand more clear than this: Do Not Invest Rs. 50,000 in NPS For Saving Tax!

Trust me, I am a 11Y old NPS investor (not my choice) and it occupies a huge, immovable, ill-liquid chunk in my portfolio. It is a trap.

Stay away from Corporate NPS, if You Wish to Retire ASAP!

Do Not Shift Your EPF Corpus to NPS: It is a Trap!

If you still wish to invest or if you have already invested, try this:

A Guide to investing in the National Pension System (NPS)

Now let us get back to what we were discussing:

Before NPS:

Net taxable income = 13.5L

Tax = 2.175L

After NPS:

Net taxable income = 13L

Tax Paid = 2.025L.

Before NPS, tax removed (as a percentage of net taxable  income): 2.175L/13.5L = 16.11%

After NPS, tax removed(as a percentage of net taxable income): 2.025L/13.5L = 15% = 2.025L/(13L + 0.5L)

Here again it is incorrect to claim “30% instant return: because of the 50K invested.

The correct equation to express the benefit is (2.175L/13.5L) – (2.025L/13.5L) = (2.175-2.025)/13.5 = 0.15/13.5 = 1.11%

Tax saved = 1.11% of net taxable income before NPS investment.

The mistake again is double counting: using this incorrect equation

(2.175-2.025)/(13.5L-13L) = .15/0.5 = 30% and claiming an imaginary return.

Do not confuse more capital to invest (with conditions) as more returns!

1.5L in 80C + 50K in NPS

We started with 15L income and because of an investment of 2L (1.5L + 0.5L), the tax liability has come to 2.025L.

That is, from the 2.625L tax it has reduced to 2.025L. A reduction of 22.86%.

Now, before any tax saving investment, tax/income = 2.625L/15L = 17.5%

After tax saving investment, tax/income = 2.025L/15L = 13.5%.

A change of 4%



You do not get any “returns” for reducing your tax outgo. All you get is more money at hand (including the tax saving investment made).

Extra capital to invest should not be confused with extra returns!!

Where you invest that extra money is more important!!

Here is another innumeracy: Can you really save tax with a home loan?!

Announcement 1 : Gamechanger paperback is still available at a 25% discount for Rs. 149 only! Grab it or gift it to a young earner

Use this form to ask general Questions or about the robo template ONLY (For comments/opinions, use the form at the bottom)

And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.  PLEASE DO NOT POST COMMENTS/OPINIONS WITH THIS FORM it is for questions only.

[contact-form][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Ask your question (Got an opinion or comment, use comment box at the bottom of the page. DO NOT post them here)” type=”textarea” required=”1″][/contact-form]

GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want

My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantco-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no Kindle necessary).

It is a book that tells you how to travel anywhere on a budget (eg. to Europe at 50% lower costs) and specific investment advice for young earners.

The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

You can Be Rich Too with Goal-Based Investing 

My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.

The book is available at:

Amazon Hardcover Rs. 271. 32% OFF

Infibeam Now just Rs. 270  32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Flipkart Rs. 279. 30% off

Kindle at (Rs.271) Read with free app

Google PlayRs. 271 Read on your PC/Tablet/Mobile

Now in Hindi!

Order the Hindi version via this link

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)