Planning to be financially self-reliant after retirement has become more important now than ever. In the era of high inflation, if you want a stable pension of Rs 1 lakh every month after retirement, then you have to invest your money wisely. The National Pension System (NPS) is one such option that can help you reach this goal, provided you invest on time and as per the plan. In this write-up, we will try to understand how much a 40-year-old needs to invest per month in the NPS to retire with a monthly pension of Rs 1 lakh.
What is NPS and how does it work?
The NPS is a long-term retirement savings scheme run by the central government which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It has two types of accounts—Tier-I, which is a mandatory pension account, and Tier-II, which is a voluntary savings account.
Investments made in Tier-I accounts are locked-in and cannot be withdrawn until the age of 60. The invested amount is divided between equities, corporate bonds and government securities, and investors can choose their own asset allocation—through active or auto choice.
NPS offers tax benefits too
Under section 80CCD(1), you can get tax exemption by investing up to Rs 1.5 lakh (which is included in the limit of 80C).
In addition, an additional deduction of Rs 50,000 under section 80CCD(1B) is available only on investments in NPS.
Thus, a total tax exemption of up to Rs 2 lakh can be availed on investments in NPS.
Now the question arises: How much should one invest to get a monthly pension of Rs 1 lakh?
If a person starts investing in NPS at the age of 40 and continues investing till the age of 60, i.e. for 20 years, he will have to create a corpus of about Rs 4.97 crore. This target is based on the condition that NPS gives an average annual return of 10% and the annuity return after retirement is around 6%.
How is the calculation done?
Suppose you invest Rs 65,000 every month in NPS. If you get an average return of 10% for the next 20 years, then your total maturity amount will be around Rs 4.97 crore.
As per NPS rules:
On retirement, you can withdraw up to 60% of the amount as a tax-free lump sum. That is, you can take Rs 2.98 crore directly into your account.
The remaining 40% (Rs 1.99 crore) will have to be used to buy an annuity plan. If this amount gets an annual return of 6%, then you can get a lifetime pension of about Rs 1 lakh per month.
This calculation is approximate and the actual pension amount will depend on the amount invested, the return rate and the annuity plan chosen.
How much money will be received on maturity and how?
NPS has the following provisions on maturity:
If the total corpus is less than Rs 5 lakh, then you can withdraw the entire amount tax-free.
If the corpus is more than Rs 5 lakh, 60% of the amount can be withdrawn tax-free, while it is mandatory to buy annuity from the remaining 40%.
You will have to pay tax on the monthly pension received from the annuity as per your tax slab.
Why is NPS special?
Benefit of long term compounding: The sooner you start, the more benefits you will get.
Low cost scheme: The fund management fee in NPS is very low compared to other mutual funds.
Transparency and freedom of choice: Investors can decide for themselves how much money should go into equity and how much into debt.
Security and regulation: Being regulated by PFRDA, the chances of fraud in NPS are very low.
Who should invest in NPS?
People who are planning for long term retirement.
Those who want tax exemption.
Those who want a plan with low risk and stable returns.
And those who want to make their future financially secure.
Conclusion
If you are in your 40s and want a pension of Rs 1 lakh every month after retirement, then start investing in NPS in a disciplined manner from today itself. This decision taken by you today will not only make your retirement secure, but will also make you self-reliant. Before investing, definitely consult your financial advisor and decide how much amount of investment will be right according to your income, expenses and future needs.