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

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!!

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 if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only 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, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This 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 Rs 199 (instant download)
Free android apps