NPS Calculator: With retirement, your regular income from employment comes to an end, and if you don’t have any other source of income during your later years, you might find yourself in financial difficulties. In 2009, to help citizens avoid such a problem, the government extended the facility of the National Pension System (NPS), commonly known as the National Pension Scheme, to employees working in the private sector and unorganised jobs. The NPS was originally started in 2004 for government employees, who were earlier covered under the Old Pension Scheme (OPS).
NPS gives a steady pension, ensuring financial independence and security for employees during their golden years. For this, employees need to contribute on a monthly or yearly basis throughout their working years. The higher their contributions and the earlier they start, the larger their retirement corpus grows.
How does NPS function?
NPS operates on a defined contribution model, meaning that retirement benefits depend on the total contributions made and the returns generated from investments. Unlike traditional pension systems with fixed payouts, NPS empowers individuals to take control of their retirement savings and grow their investments.
You can open two types of NPS accounts: Tier I and Tier II. A Tier II account is allowed to open only when you have a Tier I account. The two accounts differ primarily in terms of tax benefits and withdrawal rules.
When comparing the two types of NPS accounts, the Tier-I account has a lock-in period that lasts until the accountholder’s retirement, whereas the Tier-II account offers flexibility with no lock-in period, allowing withdrawals at any time.
For Tier-I accounts, a minimum opening deposit of Rs 500 is required, while Tier-II accounts require a minimum opening deposit of INR 1,000. Additionally, the Tier-I account mandates maintaining a minimum balance of Rs 1,000 at the end of each fiscal year, whereas Tier-II accounts have no such requirement.
How long can you invest in NPS?
You can invest in the NPS until you are 75 years old. You can continue to contribute to the NPS and take advantage of tax benefits.
NPS investment and withdrawal rules:
There is no upper limit for NPS investment, but if you are joining NPS with a tax-saving purpose in mind, you can avail tax benefit on up to Rs 2 lakh per annum investment under Section 80C (Rs 1.5 lakh) and subsection 80CCD (1B) (additional Rs 50,000).
Currently, you can withdraw up to 60% of the total corpus as a lump sum upon retirement, with the remaining 40% mandatorily invested in an annuity plan. However, under the new NPS guidelines, if the total corpus is Rs 5 lakh or less, you are allowed to withdraw the entire amount without purchasing an annuity plan. These withdrawals are also tax-free.
The NPS is an Exempt-Exempt-Exempt (EEE) product, which means that contributions, withdrawals, and accumulations are tax-free.
Also read: NPS: Starting at 50? How much should you invest per month to get a Rs 50,000 monthly pension at 65?
How much do you need to invest in NPS per month to get a pension of Rs 1 lakh?
Let’s assume you begin investing in NPS at the age of 20 and aim to receive a monthly pension of Rs 1 lakh after retiring at 60. To achieve this, we will calculate the required monthly investment, considering that, as per NPS rules, 40% of the corpus will be used to purchase an annuity plan while the remaining 60% will be withdrawn as a lump sum. Also, we will consider the rate of return on NPS investment during your job years at 10% (based on past trends) and on annuity at 6% for the calculation purpose.
For calculation, we have used SBI Pension Funds calculator.
The calculation shows that if you start investing Rs 7,850 per month in NPS and invest for 40 years till your retirement at 60, you will get a pension of Rs 1 lakh per month and receive a substantial corpus as well.
Investment start age: 20 years
Monthly investment: Rs 7,850
Expected rate of return on investment: 10%
Total investment amount: Rs 37,68,000
Interest earned on investment: Rs 4,62,89,792
Total accumulated corpus: Rs 5,00,57,792
Of this total corpus of Rs 5 crore, you invest 40% in an annuity scheme and withdraw a 60% lump sum.
Corpus invested in annuity: Rs 2,00,23,117
Rate of Annuity: 6%
Lumpsum withdrawal amount: Rs 3,00,34,675
Pension per month post-retirement: Rs 1,00,116
So, by investing Rs 7,850 per month for 40 years, you can expect a monthly pension of Rs 1 lakh after you turn 60.
Summing up:
The NPS serves as an excellent tool for securing financial independence during retirement. Starting early, such as at the age of 20, significantly boosts your retirement corpus due to the power of compounding. As demonstrated, investing just Rs 7,850 monthly in NPS for 40 years can provide a substantial corpus and ensure a comfortable monthly pension of ₹1 lakh post-retirement.
Disclaimer: FinancialExpress.com does not endorse any specific investment instruments. Readers are encouraged to make their own informed decisions, as any losses incurred will be their sole responsibility.