Employees contributing to the National Pension System (NPS) are concerned about their pension after retirement. This concern is why many government employees are also demanding a return to the old pension scheme. The NPS, or National Pension System, is a government scheme designed to help salaried individuals plan their retirement. One of the key advantages of this scheme is that it can be started at the age of 18. This allows more time for your money to grow, enabling you to accumulate a substantial fund for retirement.
Retirement planning with NPS
The NPS was launched by the central government on January 1, 2004. Initially, it was only available to government employees, but it was later opened to the general public. As a result, any Indian citizen can now invest in this scheme for their retirement.
How does NPS work?
NPS is a long-term scheme managed by the Pension Fund Regulatory and Development Authority (PFRDA). Anyone between the ages of 18 and 70 can invest in it. In NPS, after the age of 60, 60% of the accumulated amount can be withdrawn as a lump sum. The remaining 40% must be invested in an annuity, which is used to provide a pension. Typically, NPS offers a return of 9 to 12%.
Also read: NPS Calculator: How much should you invest to get Rs 1 lakh pension per month?
NPS tax and other benefits
In NPS, a deduction benefit of up to Rs 1.5 lakh is available under Section 80C of the Income Tax Act, and an additional rebate of Rs 50,000 is available under Section 80CCD(1B). A special feature of NPS is that the amount received is tax-free.
How much do you need to invest in NPS to get a monthly pension of Rs 50,000?
Through a calculation, we will understand that how much pension can actually be obtained through NPS and, if someone wants to get a pension of Rs 50,000 per month post retirement, how much he or she needs to contribute each month.
NPS calculator:
- Assuming you open an NPS account at 25 and contribute Rs 6,531 per month until the age of 60.
- Your total investment over 35-year period comes to Rs 27,43,020.
- Total fund accumulated assuming a yearly return of 10% will be Rs 2.5 crore.
- Interest earned over 35 years will be Rs 2.23 crore.
- Based on this calculation, you will receive a pension of Rs 50,000 per month after retirement on investing 40% of this corpus in an annuity scheme with 6% interest.
NPS rule: The rule of NPS is that upon retirement, you can withdraw 60% of the total corpus as a lump sum and invest 40% in an annuity scheme.
According to the NPS calculator, if a 25-year-old person contributes Rs 6,500 per month to NPS until the age of 60, he will have 35 years of investment period. The individual will receive a pension of Rs 50,000 per month after retirement in NPS. Over this period, he will invest a total of Rs 27.43 lakh and accumulate a fund of Rs 2.5 crore. This results in a profit of Rs 2.23 crore.