NPS investments: Have you turned 40 and haven’t started your retirement savings yet? Don’t worry—you can start with an NPS and secure both a good retirement corpus and a regular pension after retirement.

The National Pension System (NPS), backed by the Government of India, is a voluntary pension scheme started with an aim to promote social security for all citizens and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

On retirement, NPS subscribers are allowed to make tax-free withdrawals from their NPS accounts. If their retirement corpus is up to Rs 5 lakh, they can withdraw the entire amount tax-free. For larger amounts, 60% of the corpus can be withdrawn tax-free, while the remainder must be used to purchase an annuity plan. Annuities are taxable based on the subscriber’s income bracket, with payments made directly to the subscriber’s account through an Annuity Service Provider (ASP). Subscribers are required to use at least a portion of their corpus to purchase an annuity.

NPS has been around for over 15 years and has delivered annual returns of 9% to 12%. If you’re not satisfied with your fund’s performance, you can switch to a different fund manager.

Also read: NPS Calculator: How much should you invest to get Rs 1 lakh pension per month?

In this article, we’ll explore how much a 40-year-old needs to invest in an NPS scheme to secure a monthly pension of Rs 1 lakh and build a total corpus of Rs 5 crore by age 60. To achieve this, you would need to invest at least Rs 50,000 per month with a 12% annual return to reach the Rs 5 crore goal. From this corpus, you can withdraw Rs 3 crore as a lump sum and invest Rs 2 crore in an annuity plan offering a 6% annual return.

Here’s the calculation breakdown:

Start by investing at least Rs 50,000 per month in the NPS.

Set your return target:

  • Aim for an annual return of 12% over the next 20 years to build a corpus of Rs 5 crore.

Plan your corpus distribution upon retirement:

  • Lump Sum Withdrawal: Withdraw Rs 3 crore as a lump sum at the time of retirement.
  • Annuity Investment: Invest the remaining Rs 2 crore in an annuity plan with a 6% annual return.

Outcome:

  • The annuity investment will provide you with a monthly pension of Rs 1 lakh.

National Pension Scheme tax benefits:

Employees contributing to NPS can avail the following tax benefits:

A tax deduction of up to 10% of their salary (Basic + DA) under Section 80CCD(1), with a maximum limit of Rs. 1.5 lakh under Section 80CCE.

An additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B), over and above the overall Rs. 1.5 lakh limit under Section 80CCE.

How does NPS function?

Under NPS account, there are two types of accounts – Tier I and Tier II. Tier I account is mandatory to have if someone aims to open Tier II account.

Following are the salient features of the Tier-I and Tier-II accounts:

Tier-I account: This is a restricted and conditional withdrawable retirement account which can be withdrawn only upon meeting the exit conditions prescribed under NPS.

Tier-II account: This is a voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish.