A retirement pension provides a consistent source of income during a period when individuals are no longer actively earning or have reduced earnings. For employees in the private sector, this represents a significant benefit, as it allows them to participate in programs that guarantee a steady income upon retirement. The National Pension System (NPS) serves as one such viable option for retirement savings. This scheme promotes financial stability in retirement by motivating individuals to save and invest systematically over an extended period.

To calculate how much a 30-year-old needs to invest for a monthly pension of Rs 2 lakh through the NPS, we will consider several factors:

1. Investment period: 35 years (from age 30 to 65).

2. Expected rate of return: Around 12% 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.

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Example:

If you start contributing Rs 15,500 per month towards the NPS and consistently invest until the age of 65, your retirement savings could grow significantly. Assuming an annual return of 12% on your investments, your accumulated corpus will be substantial by the time you retire. Based on these projections, your monthly pension could exceed Rs 2 lakh, providing a steady and reliable income for your retirement years. This estimation depends on maintaining consistent contributions and achieving the assumed rate of return, highlighting the potential of NPS as a powerful tool for long-term retirement planning.

Tax benefits to employees on self-contribution

Employees contributing to NPS are eligible for following tax benefits on their own contribution:

  1. 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.
  2. 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 National Pension System is a government-sponsored pension initiative that aims to facilitate retirement savings. It provides an effective means to enhance your retirement savings while allowing for a diversified investment strategy. With its clear return structure and tax benefits, the NPS is recognized as a compelling alternative. The combination of its cost-effective framework and the benefits of compounding renders it an attractive option for establishing a robust retirement fund. ”

Types of 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.

For investors, one of the key things to keep in mind while planning for their retirement pension is to assess their existing and future expenses. This will give you a fair idea how much you will need while planning your retirement.