With inflation constantly eating away at the value of money, securing a large pension for your retirement is essential. The National Pension System (NPS), a government-backed scheme, offers a reliable way to build a significant retirement corpus while providing tax benefits. If you’re 30 years old and aiming for a pension of Rs. 2 lakh per month after you retire, here’s a step-by-step guide on how much you need to invest and the potential returns.
What Is NPS and How Does It Work?
The National Pension System (NPS) is a retirement-focused investment plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed to provide retirement income by allowing regular contributions from your earnings. NPS is available to both government employees and private sector workers, as well as self-employed individuals and NRIs.
The scheme works on a defined contribution basis, which means the wealth you accumulate depends on how much you contribute, for how long, and the returns generated by your investments.
How to Get a Rs. 2 Lakh Monthly Pension Through NPS
If you’re planning for a comfortable retirement with a Rs. 2 lakh monthly pension, here’s an example calculation to show how much you’ll need to invest. Suppose you are 30 years old, and you start investing Rs. 25,000 per month in NPS. With an average annual return of 10%, here’s what your retirement corpus will look like by the time you turn 60.
- Age to start investing: 30 years
- Monthly investment in NPS: Rs. 25,000
- Investment duration: 30 years
- Total amount invested over 30 years: Rs. 90 lakh
- Estimated return on investment: 10% annually
- Total retirement corpus at 60 years: Rs. 5.69 crore
This means by investing Rs. 25,000 every month for 30 years, you will have accumulated a corpus of Rs. 5.69 crore by the time you reach 60, assuming a 10% annual return on investment.
How Does the Pension Calculation Work?
Under the NPS rules, at least 40% of your retirement corpus must be invested in an annuity plan to generate regular pension income. However, in this case, the person opts to allocate 55% of their corpus towards an annuity. An annuity is a financial product that provides a steady income after retirement.
- Invested in an annuity plan: 55% of corpus
- Annuity returns: 8%
- Amount invested in annuity: Rs. 3.13 crore
- Estimated monthly pension: Rs. 2,08,938
By investing 55% of the retirement corpus in an annuity with an 8% return, you can generate a monthly pension of slightly over Rs. 2 lakh. This makes NPS a strong option for those looking to secure a high post-retirement income.
How to Start Investing in NPS
To start investing in NPS, you need to open an account, which can be done online or through authorized service providers like banks and post offices. Once your account is open, you can contribute regularly to build your pension wealth.
NPS offers flexibility in terms of the amount you contribute and the choice of pension fund managers, so you can adjust your contributions based on your income and financial goals. You can also switch fund managers or investment options to suit your risk appetite.
Tax Benefits of Investing in NPS
One of the significant advantages of NPS is the tax savings it offers. Here’s a breakdown of the tax benefits you can claim:
- Under Section 80C: Deduction of up to Rs. 1.5 lakh annually.
- Under Section 80CCD (1B): Additional deduction of up to Rs. 50,000.
- Total tax exemption: Rs. 2 lakh annually on your NPS investments.
This makes NPS not only a smart retirement planning tool but also a tax-efficient one. You get the dual benefit of saving for your future while reducing your current tax liabilities.
Benefits of NPS
NPS is widely regarded as one of the most cost-effective and flexible retirement plans. Here are some key advantages:
- Cost-Effective: NPS charges lower fund management fees compared to other investment schemes, making it a cost-efficient option.
- Tax Savings: With tax benefits up to Rs. 2 lakh, NPS helps you save significantly on your tax bill.
- Compounding Growth: The power of compounding means that even modest monthly contributions can grow substantially over time.
- Flexible Options: You can choose between various fund managers and investment options, including equity, corporate bonds, and government securities, depending on your risk tolerance.
- Transparency: The entire process is monitored by PFRDA, ensuring your investments are well-regulated.
- Portability: NPS accounts are portable, meaning they can be maintained regardless of job changes or location shifts.
Who Can Invest in NPS?
The National Pension System is open to Indian citizens aged between 18 and 70 years, including both salaried and self-employed individuals. NRIs are also eligible to invest in NPS. Once you open an NPS account, you are required to contribute until you reach 60 years of age. However, contributions can be made up to 70 years if you choose to extend your account.
Final Thoughts
Investing in NPS offers a reliable pathway to secure a comfortable retirement, especially for those starting early in their careers. With a disciplined investment strategy, you can create a substantial retirement fund that will not only support you financially but also provide a regular income stream through annuities. Start early, stay committed, and watch your retirement dreams come true with NPS.
