NPS Calculator: National Pension System (NPS) is a retirement and savings scheme that works on a contribution-based system. Its main objective is to provide financial security to people after retirement.
The most important thing about NPS is that it does not guarantee any fixed benefit. Your pension amount is decided based on the investment you make and the returns you get on it.
As after retirement, your income stops and expenses remain at the same level or increase, a stable income source is needed to maintain financial independence.
In this article, we’ll explore how much a 25-year-old should invest each month to achieve a monthly pension of Rs 1 lakh after retirement at the age of 60. The calculations are based on the assumption that individuals typically start working around the age of 25, after completing their higher education.
Assumptions for the calculation under NPS:
Investment Return: We assume a moderate annual return of 12% on investments over the 35-year period.
Annuity Return Post-Retirement: After retirement, we assume a conservative and realistic return of 6% per annum on the annuity investment.
Investment plan:
Investment Period: 35 years (from age 25 to 60)
Target Monthly Pension: Rs 1 lakh
To achieve the target of Rs 1 lakh per month as a pension, the individual needs to invest approximately Rs 7,750 per month for the next 35 years, assuming an annual return of 12%. This return rate is moderate and achievable, given that the National Pension System (NPS) has historically provided around 10% returns annually.
After 35 years, the total investment will amount to around Rs 5 crore. To generate a monthly pension of Rs 1 lakh, at least 40% of this corpus (Rs 2 crore) will need to be used to purchase an annuity scheme. Assuming the annuity provides an annual return of 6%, this corpus will be sufficient to generate a pension of Rs 1 lakh per month.
Now let’s understand how NPS investment works:
Under NPS, one has to mandatorily invest at least 40% of the maturity amount in an annuity scheme. However, one has the liberty to invest the entire 100% maturity amount to buy annuity plan. But if 40% is invested in annuity, the remaining 60% lumpsum withdrawal becomes tax-free.
NPS tax benefits:
By investing in NPS, one can claim a tax deduction of up to Rs 2 lakh – Rs 1.5 lakh under Section 80C and an additional Rs 50,000 under Section 80CCD(1B). This means that if you are in the 30% tax bracket, you could potentially save Rs 62,400 in taxes.
