National Pension System (NPS): Suppose a person, who works in a private company, is 40 years old and earns around 1 lakh rupees. Their household is doing well with this income, but they have made the mistake of not planning for retirement until now. Seeing others plan for their pensions from a young age, they realize that it is important to think about how they will manage their expenses after retirement and start investing.
NPS is the solution to remove this tension
The solution to this worry is the National Pension System (NPS). If this person invests properly in this scheme, they can accumulate a pension of Rs 1 lakh per month and a corpus of at least Rs 1 crore in the next 20 years by retirement. We will explain the calculation later, but first, let’s get basic information about NPS.
What does NPS mean?
National Pension System (NPS) is an investment scheme designed for pensions after retirement. It is regulated by the Pension Fund Regulatory and Development Authority under the PFRDA Act 2013. Under NPS, the savings of investors are deposited in a pension fund.
Any Indian citizen between the ages of 18 and 70 years can open an account in NPS. Whether you are a government employee, working in the private sector, or even a Non-Resident Indian (NRI), you can take advantage of this scheme. After opening the account, contributions need to be made until the age of 60 or until maturity.
At the time of retirement, at least 40% of the amount deposited in the NPS account must be invested in annuity through a registered annuity service provider (ASP). The remaining 60% can be withdrawn as a lump sum. If the investor prefers, they can invest more than 40% in an annuity, according to their need. In return, the investor receives a fixed monthly pension.
Calculation of Rs 1 lakh pension through NPS
- Age to start investment: 40 years
- Investment period: 20 years (till the age of 60)
- Monthly investment in NPS: Rs 20,000
- Step-up in investment after every one year: 10%
- Total investment in 20 years: Rs 1,37,46,000
- Estimated return on investment: 10% annually
- Total corpus: Rs 3,22,90,815 (approximately Rs 3.23 crore)
- Total benefit: Rs 1,85,44,815 (Rs 1.85 crore)
- Total tax saving: Rs 41,23,800
After accumulating about Rs 3.23 crore through NPS, half of the corpus (Rs 1.61 crore) will be invested in an annuity plan for the pension. The remaining half will be withdrawn as a lump sum.
- Investment of pension wealth in annuity plan: 50%
- Return on annuity: 8%
- Amount invested in an annuity: Rs 1,61,45,407.5 (Rs 1.61 crore)
- Lump sum withdrawn: Rs 1,61,45,407.5 (Rs 1.61 crore)
- Monthly pension: Rs 1,07,636 (Rs 1.07 lakh)
By investing in this way, the person will receive a lump sum of Rs 1.61 crore at retirement. At the same time, they will begin receiving a monthly pension of about Rs 1 lakh.
Disclaimer:
The information provided here is for general informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.