The National Pension System (NPS) is a retirement savings initiative established in India by the Pension Fund Regulatory and Development Authority (PFRDA). This program aims to ensure financial stability in retirement by motivating individuals to save and invest systematically over an extended period, thereby addressing their financial requirements in old age.

To determine the investment amount required for a 25-year old to achieve a monthly pension of Rs 1.5 lakh through the NPS, several key factors must be taken into account:

1. Duration of investment: 40 years (from age 25 to 65).

2. Anticipated rate of return: Approximately 10% per annum during the accumulation phase.

3. Annuity rate: Estimated at around 6% at the time of retirement.

4. Annuity acquisition: The NPS stipulates that a minimum of 40% of the total corpus must be allocated to purchase an annuity for receiving a regular pension.

Also Read: Top 5 credit cards for free domestic and international airport lounge access

Step-by-step process:

1. Monthly pension requirement: Rs 1.5 lakh.

2. Annual pension requirement: Rs 18 lakh.

3. Required annuity corpus: To determine the corpus necessary for a monthly pension of Rs 1.5 lakh at an annuity rate of 6%, the appropriate formula will be applied.

4. Total corpus needed at retirement: As only 40% of the NPS corpus will be allocated for the purchase of an annuity, the total corpus required will be calculated accordingly. In order to secure a monthly pension of Rs 1.5 lakh through the NPS upon retirement, a 25-year-old individual must invest approximately Rs 11,859 each month for a duration of 40 years, assuming an anticipated return of 10% during the accumulation phase and an annuity rate of 6%.

Tax Advantages for Employees Making Self-Contributions

Employees participating in the National Pension System (NPS) can avail themselves of specific tax benefits linked to their personal contributions:

1. A tax deduction of up to 10% of the salary (Basic + Dearness Allowance) is available under Section 80 CCD(1), subject to an overall limit of Rs 1.50 lakh as per Section 80 CCE.

2. An additional tax deduction of up to Rs 50,000 can be claimed under Section 80 CCD(1B), which is above the overall limit of Rs 1.50 lakh under Section 80 CCE.

“The NPS is a market-linked contribution scheme aimed at facilitating retirement savings. It provides an effective means to enhance your retirement fund while diversifying your investment portfolio. With its transparent returns and tax efficiency, the NPS is a compelling choice. The combination of its low-cost structure and the benefits of compounding makes it an attractive option for establishing a secure retirement fund,” informs Adhil Shetty, CEO of Bankbazaar.com.

Account Types

Tier-I Account: This account functions as a permanent retirement fund where regular contributions from the subscriber and/or their employer are collected and invested according to the chosen scheme or fund manager.

Tier-II Account: This account is a voluntary and withdrawable option, accessible only if an active Tier I account exists. Withdrawals from this account can be made as needed.

This scheme allows for the accumulation of a significant corpus while also providing the benefit of a regular pension, aiding in the management of expenses during retirement when one is no longer earning an income.