The National Pension System (NPS) is a sound product for retirement planning exclusive for the employees of the private organisations. The earlier one starts contributing towards NPS and invests prudently, one can build a nice corpus for retirement benefit and enjoy a decent monthly pension. I have already indicated that NPS does not promise pension at a fixed amount; instead, it depends on the annuity rate that one has chosen from the rebukes that has been accumulated for several years.
In this article, this author will analyze the amount 25-year-olds have to incorporate to make a monthly pension of approximately Rs 1.5 lakhs at the time of retirement to be able to build a retirement corpus of approximately Rs 6.75 crore.
Table of Contents
Understanding NPS Investment
The National Pension System mandates that at least 40% of your accumulated corpus has to be invested for an annuity with PFRDA registered Annuity Service Provider. The rest 60% which has not been utilized in any way can be withdrawn tax freely and this could be in cash.
NPS comprises two types of accounts:NPS comprises two types of accounts:
- Tier 1 Account: Compulsory for pension fund contribution and has tax incentive attached to it.
- Tier 2 Account: A special savings account which doesn’t offer the option to get tax credit whereby it can only be opened with a tier 1 account.
Apart from what has been mentioned above, you can also avail tax deduction of Rs 50000 under Section 80CCD (1B). For years only Rs. 1,00, 000 was allowed as deduction under section 80 C but now extend up to the Rs. 5,00, 000. Also, 60% of the maturity amount from NPS is tax-exempt in case of withdrawal of the amount.
Finding out the Monthly Investment for the Rs 1.5 Lakh Pension
If you were targeting for Rs 1 as monthly pension if you retire at the age of 60 years then one has to save Rs. 5 lakh at age 60, starting from age 25, follow these calculations:5 lakh at age 60, starting from age 25, follow these calculations:
Monthly Investment Required: Spend 6000 rs per month
Expected Rate of Return: At an interest rate of the 12% per annum.
Investment Breakdown:
- Total Invested: During this investment period, you would make total investment of Rs 25. 2 lakh.
- Total Maturity Value: Your corpus will, thus, expand to around Rs 6. 74 crore by retirement.
Distribution of Maturity Value:
- Annuity Purchase: Approximately Rs, 2. Out of this 7 crore will be utilized in purchasing an annuity.
- Lumpsum Withdrawal: You can get about around Rs 4. 4 crore with Absolutely no Clauses added to it as a lump sum for the extension of services.
- Expected Monthly Pension: By using this strategy you can anticipate that the monthly pension will be somewhere around Rs 1. 48 lakh.
What the following breakdown exhibits is how the disciplined monthly savings and the allied rate of return can help create a good corpus for retirement and pension fund.
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