NPS vs mutual funds: How Corporate NPS creates a Rs 1.61 crore bigger retirement corpus in 25 years
Imagine two 35-year-old employees earning the same salary. Both decide to save for retirement until they turn 60. Both invest the same amount every month. Both earn the same 12% annual return on their investments.
Yet, when they retire, one has a corpus of Rs 5.17 crore while the other has only Rs 3.56 crore — a gap of Rs 1.61 crore.
How can the same investment, made for the same number of years and earning the same return, produce such different outcomes?
A presentation by PPFAS Pension says the answer lies not in investment returns but in the way the money is invested and the tax benefits available under Corporate NPS. The presentation compares Corporate NPS with a mutual fund SIP and explains why the retirement corpus can differ significantly even when investment returns remain the same.
However, the presentation also makes it clear that the comparison is only an illustration based on specific assumptions and is not a guarantee of returns.
The example used in the presentation
The comparison is based on a salaried employee with the following profile:
Age: 35 years
Annual salary: Rs 30 lakh
Basic salary: Rs 15 lakh
Tax bracket: 30%
Investment period: Till age 60
The presentation assumes that the employee continues investing until retirement.
Here’s what the comparison shows
According to the presentation, the same employee can invest through either Corporate NPS or a mutual fund SIP.
The assumptions are:
Annual return: 12%
Contribution increases by 7% every year.
Corporate NPS
Monthly investment: Rs 17,500
Retirement corpus at 60: Rs 5.17 crore
Mutual fund SIP
Monthly investment after tax: Rs 12,040
Retirement corpus at 60: Rs 3.56 crore
That results in a corpus difference of Rs 1.61 crore.
Why is there such a big difference?
The presentation says the difference is not because Corporate NPS earns higher returns.
Instead, it comes from the tax treatment.
Under the example, the employee contributes Rs 17,500 every month through Corporate NPS before income tax is deducted under Section 80CCD(2). In contrast, if the same salary is first taxed and the remaining amount is invested through a mutual fund SIP, only Rs 12,040 is available for investment every month.
Since a larger amount gets invested from the very beginning, that additional money also compounds over the next 25 years. According to the presentation, this is the main reason the Corporate NPS corpus becomes much larger despite assuming identical investment returns.
The retirement income comparison
The presentation also compares the income that both investments may generate after retirement.
For the Corporate NPS example:
60% of the corpus is withdrawn and used through a systematic withdrawal plan (SWP).
The remaining 20% is withdrawn through SWP.
Another 20% is used to buy an annuity.
Based on these assumptions, the estimated monthly income works out to around ₹2.63 lakh before tax.
For the mutual fund SIP example, the entire corpus is assumed to be used through SWP, resulting in an estimated monthly income of ₹1.78 lakh before tax.
What is Corporate NPS?
Corporate NPS is a version of the National Pension System offered through employers.
Here, both the employer and the employee can contribute to the retirement account. Employer contributions qualify for tax benefits under Section 80CCD(2), making it one of the biggest attractions of Corporate NPS for salaried employees.
The presentation notes that companies can decide the contribution structure. Contributions may come from both employer and employee, or from either one of them. Employees can also choose their pension fund manager and investment strategy.
What is Self NPS?
If your employer does not offer Corporate NPS, you can still open an NPS account yourself under the All Citizen Model, often referred to as Self NPS.
This model is open to any Indian citizen between the ages of 18 and 85 years. Investors can choose between Active Choice, where they decide the asset allocation themselves, or Auto Choice, where the allocation changes automatically with age.
Under the old tax regime, self-contributions are eligible for an additional deduction under Section 80CCD(1B), subject to the prescribed limit. However, the presentation notes that this deduction is not available under the new tax regime.
How much tax can Corporate NPS help save?
The presentation includes another illustration for the same employee.
Under the old tax regime, combining Self NPS and Corporate NPS reduces the tax payable by Rs 62,400.
Under the new tax regime, where only the Corporate NPS benefit is available, the tax saving works out to Rs 65,520.
Key features of NPS
The presentation highlights several features of NPS:
Low fund management charges compared with many other investment products.
Market-linked returns.
Choice of pension fund manager.
Flexibility to choose asset allocation.
Portability across jobs and cities using the same PRAN.
Regulation by the Pension Fund Regulatory and Development Authority (PFRDA).
Online access for contributions and account management.
The important takeaway
The comparison presented by PPFAS Pension is not trying to show that NPS delivers higher market returns than mutual funds. Both investments are assumed to earn the same 12% annual return.
Instead, the illustration argues that Corporate NPS can build a larger retirement corpus because tax benefits allow a bigger amount to be invested from the very beginning, giving compounding more money to work with over the long term. At the same time, the presentation clearly states that the calculations are based on specific assumptions and should not be treated as guaranteed investment outcomes.
Disclaimer: The calculations and comparisons in this story are based on illustrations presented in the PPFAS Pension presentation. They rely on specific assumptions, including a 12% annual return, a 7% annual increase in contributions, applicable tax rules and a defined investment period. Actual returns, tax benefits and retirement corpus may vary depending on individual circumstances, market performance and future regulatory changes. This comparison is for illustrative purposes only and should not be treated as investment advice or a guarantee of returns.
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