NPS Calculator: Know how consistent investment in the National Pension Scheme (NPS) can help middle-class investors build a Rs 5 crore retirement corpus and secure a Rs 1 lakh monthly pension by age 60.
NPS Calculator: The National Pension Scheme (NPS) has emerged as a popular investment-cum-retirement option for middle-class investors. By investing in NPS, one can build a substantial retirement corpus while enjoying tax benefits. In this article, we will explore how an individual can accumulate a retirement corpus of around Rs 5 crore and secure a monthly pension of Rs 1 lakh by purchasing an annuity scheme. Through this illustration, we examine how consistent investment in NPS, starting at the age of 27 and continuing until the age of 60, can help achieve this financial milestone.
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How is NPS annuity calculated?
Upon reaching 60 years of age or the superannuation age, at least 40% of the accumulated corpus in the NPS must be converted into an annuity. This annuity is a regular payment made to the subscriber for the rest of their life. The remaining 60% of the corpus can be withdrawn as a lump sum by the subscriber.
Let’s break down the journey to a Rs 5 crore corpus and a Rs 1 lakh monthly pension:
Age of investor: 27 years
Years of contribution: 33 years (up to the age of 60)
Annual contribution: Rs 2,00,000
Expected rate of return: 10% per annum
Annuity purchase: 40% of the accumulated corpus
Expected annuity rate: 6% per annum
Total investment:
Annual contribution: Rs 2,00,000
Number of years: 33 years
Total investment: Rs 2,00,000 * 33 = Rs 65,99,736
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Accumulated corpus:
Using the assumed rate of return of 10% per annum, the accumulated corpus after 33 years would be approximately Rs 5,19,15,841.
Total gains:
Total gain = Accumulated corpus – Total investment = Rs 5,19,15,841 – Rs 65,99,736 = Rs 4,53,16,105
Annuity purchase:
At the age of 60, 40% of the accumulated corpus must be converted into an annuity.
Annuity corpus = 40% of Rs 5,19,15,841 = Rs 2,07,66,336
The remaining 60% can be withdrawn as a lump sum.
Monthly pension:
Assuming an annuity rate of 6%, the monthly pension would be calculated as follows:
Annual pension = Rs 2,07,66,336 * 6% = Rs 12,45,980
Monthly pension = Rs 12,45,980 / 12 = Rs 1,03,832
By carefully planning NPS contributions over 33 years, it is feasible to retire with a corpus of over Rs 5 crore and secure a monthly pension of approximately Rs 1 lakh.
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Tax benefits on NPS Tier 1 and Tier 2 returns:
When investing in the NPS, it’s important to understand the tax benefits associated with both Tier 1 and Tier 2 accounts:
Deduction under Section 80CCE: All NPS Tier 1 subscribers can claim a tax deduction of up to Rs 1.5 lakh on their contributions.
Tax on annuity purchase: The entire amount used to purchase an annuity is exempt from tax. However, the income received from the annuity will be taxed according to the applicable income tax rates.
Tax on lump sum withdrawal: Upon reaching the age of 60, you can withdraw up to 40% of the accumulated corpus as a lump sum, which is tax-free. The remaining 60% must be used to purchase an annuity, and the returns from the annuity will be subject to taxation.
