NPS was launched to provide financial security during retirement by encouraging people to systematically save and invest over the long term and secure their old age financial needs.
The National Pension System (NPS) is a retirement savings scheme in India, launched by the Pension Fund Regulatory and Development Authority (PFRDA). The scheme was launched to provide financial security during retirement by encouraging people to systematically save and invest over the long term and secure their old age financial needs.
To calculate how much a 25-year-old needs to invest for a monthly pension of Rs 1.5 lakh through the National Pension System (NPS), we will consider several factors:
Read More: Sukanya Samriddhi Yojana: How much can you get if you invest Rs 10,000 per month. Calculations here
1. Investment period: 40 years (from age 25 to 65).
2. Expected rate of return: Around 10% per annum during the accumulation phase.
3. Annuity rate: Around 6% at the time of retirement.
4. Annuity purchase: NPS mandates that at least 40% of the corpus be used to purchase an annuity for regular pension.
Step-by-step process:
1. Pension requirement: Rs 1.5 lakh per month.
2. Required annual pension: Rs 18 lakh per annum.
3. Annuity corpus needed: If the annuity rate is 6%, the corpus required for a Rs 1.5 lakh monthly pension will be calculated using the formula:
4. Total corpus needed at retirement: Since only 40% of the NPS corpus will go towards purchasing an annuity, the total corpus required will be calculated accordingly.
To receive a monthly pension of Rs 1.5 lakh through the NPS at retirement, a 25-year-old needs to invest approximately Rs 11,859 per month for 40 years, assuming an expected return of 10% during the accumulation phase and an annuity rate of 6%.
Read More: Retirement Planning: With UPS in the fray soon, is it the time for govt employees to exit NPS?
How much to invest for a monthly pension of Rs 2 lakh?
If you are a 25-year-old salaried individual and decide to invest Rs 15,000 each month into your NPS account, maintaining this investment until you reach the age of 65, your contributions will extend over a period of 40 years. With an anticipated return of 10% on your investment, and with 45% of the total corpus designated for an annuity at a rate of 6%, you can anticipate receiving a monthly pension exceeding Rs 2 lakh upon retirement.
Tax benefits to employees on self-contribution
Employees who contribute to the NPS are entitled to the following tax advantages based on their individual contributions:
- Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.
- Tax deduction up to Rs 50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.
Adhil Shetty, CEO of Bankbazaar.com, says, “The NPS is a market-linked contribution plan designed to help you save for retirement. It offers an efficient way to grow your retirement fund while diversifying your investment portfolio. With transparent returns and tax efficiency, NPS stands out as a strong option. The dual advantages of its low-cost structure and the power of compounding make it an appealing choice for building a secure retirement corpus.”
Types of NPS Accounts
Tier-I account:
This account serves as a permanent retirement fund where regular contributions from the subscriber and/or their employer are deposited and invested according to the scheme or fund manager selected by the individual.
Tier-II account:
This is a voluntary/optional withdrawable account which is allowed only if you have an active Tier I account. The withdrawals are permitted from this account as and when you require.
This scheme enables you to accumulate a substantial corpus while also providing the advantage of a regular pension, which assists you in maintaining and managing your expenses during retirement when you are no longer earning an income.
