NPS scheme provides up to Rs 1.50 lakh tax exemption on deposits under Section 80C of the Income Tax Act. While those with Tier-1 account of NPS gets a further Rs 50,000 tax relaxation under Section 80CCD.
NPS: National Pension Scheme (NPS) is a central government-run retirement scheme which aims at providing a lump sum money and monthly pension to its account holders at the time of retirement. The scheme that was started for central government employees was followed by states, and is now open to private sector employees under the name of National Pension System. The scheme provides up to Rs 1.50 lakh tax exemption on deposits under Section 80C of the Income Tax Act. While those with Tier-1 account of NPS gets a further Rs 50,000 tax relaxation under Section 80CCD.
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NPS: How does NPS work?
An NPS account holder makes monthly contributions.
The government invests this money in market-linked programmes, debt, corporate bonds and securities.
The NPS provides compound returns, so the corpus grows faster as the investment gets older.
At the age of 60, the accountholder has two options- they can withdraw up to 60 per cent of their corpus as lump sum.
The government invests the rest 40 per cent annuities in debt or any scheme that provides guaranteed returns.
From this return, the government provides a monthly pension to its accountholders.
Because of compounding, even if one is investing small amount of Rs 10,000 starting age 25, they may get over Rs 1.50 lakh monthly pension at the time of retirement.
In this write-up, through calculations, know how is it possible.
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NPS: How to get over Rs 1.50 lakh income with Rs 10K monthly contribution?
Suppose you are 25-year-old and you start contributing Rs 10,000 to your NPS account.
You keep investing for the next 35 years and at 60 years of age, you get 10 per cent annual return on your investments, you decide to withdraw a lump sum amount and reinvest the rest in anuuities, you have four scenarios then-
If you withdraw 40 per cent lump sum
In 35 years, your contributions will be Rs 42 lakh, total gains will be 3.41 crore and the total corpus will be Rs 3.83 crore.
Since you have decided to withdraw 60 per cent of your corpus, your withdrawal amount will be Rs 2.29 crore and annuity value will be Rs 1.53 crore.
Of this annuity, if you get a six per cent annual return, you will get Rs 76,566 income a month.
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If you withdraw 60 per cent lump sum
You will invest Rs 42 lakh in 35 years, the total gains will be 3.41 crore and the total corpus will be Rs 3.83 crore.
Since you are withdrawing 40 per cent of your corpus amount, your withdrawal amount will be Rs 1.53 crore and the annuity value will be Rs 2.29 crore.
On this annuity, if you get a six per cent annual return, you will get Rs 1,14,848 pension a month.
If you withdraw 80 per cent lump sum
Your investment, total gains, and total corpus will remain the same as in the first two conditions.
Since you are withdrawing 20 per cent of your corpus amount, your withdrawal amount will be Rs 76.57 lakh and the annuity value will be Rs 3.06 crore.
On this annuity, if you get six per cent return a year, you will get Rs 1,53,131 monthly pension.
If you withdraw 80 per cent lump sum
Your investment, total gains, and total corpus will remain the same as in the first three conditions.
Since you are not withdrawing any amount, your annuity value will be Rs 3.83 crore.
On this annuity, if you get a six per cent return, you will get Rs 1,91,414 monthly pension.
