NPS Strategy: Steps to earn Rs 1.5 lakh monthly pension post retirement

The National Pension System (NPS) is a retirement savings program introduced in India by the Pension Fund Regulatory and Development Authority (PFRDA). The primary goal of this initiative is to provide individuals with financial security during their retirement years by encouraging them to save and invest consistently over a long duration. This approach is designed to meet their financial needs in later life.

To calculate the necessary investment amount for a 25-year-old aiming for a monthly pension of Rs 1.5 lakh through the NPS, several crucial factors must be considered:

Investment Duration: 40 years (from age 25 to 65).
Expected Rate of Return: Roughly 10% per year during the accumulation phase.
Annuity Rate: Projected to be around 6% at the time of retirement.
Annuity Purchase Requirement: The NPS mandates that at least 40% of the total corpus must be used to acquire an annuity to receive a regular pension.

Table of Contents

Step-by-Step Process:

Monthly Pension Requirement: Rs 1.5 lakh.
Annual Pension Requirement: Rs 18 lakh.
Required Annuity Corpus: To calculate the corpus necessary for a monthly pension of Rs 1.5 lakh at an annuity rate of 6%, the appropriate formula will be utilized.
Total Corpus Needed at Retirement: Since only 40% of the NPS corpus will be allocated for the annuity purchase, the total required corpus will be calculated accordingly. To secure a monthly pension of Rs 1.5 lakh through the NPS upon retirement, a 25-year-old must invest approximately Rs 11,859 each month over 40 years, assuming a projected return of 10% during the accumulation phase and an annuity rate of 6%.

Tax Benefits for Employees Making Personal Contributions

Employees contributing to the National Pension System (NPS) can take advantage of specific tax benefits related to their personal contributions:

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 1.5 lakh as per Section 80 CCE.
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 1.5 lakh under Section 80 CCE.

According to Adhil Shetty, CEO of Bankbazaar.com, “The NPS is a market-linked contribution scheme designed to facilitate retirement savings. It offers an effective way to boost your retirement fund while diversifying your investment portfolio. With its transparent returns and tax efficiency, the NPS is a strong choice. The combination of its low-cost structure and the advantages of compounding makes it an appealing option for building a secure 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 collected and invested based on the chosen scheme or fund manager.
Tier-II Account: This is a voluntary and withdrawable account, accessible only if an active Tier-I account exists. Withdrawals from this account can be made as required.

This scheme enables the accumulation of a substantial corpus while providing the advantage of a regular pension, assisting in managing expenses during retirement when individuals are no longer earning an income.

Conclusion

In conclusion, the National Pension System (NPS) serves as a vital tool for retirement planning in India. With its dual account structure, potential tax benefits, and flexibility in contributions, the NPS offers individuals a robust means of securing their financial future.

By starting early and investing consistently, you can build a significant corpus to ensure a comfortable retirement. Embrace the opportunities provided by the NPS and take control of your financial destiny today.