A Pension of ₹1 Lakh a Month? NPS Shows The Way!

Planning for retirement can assist people in achieving financial freedom and maintaining their preferred lifestyle during their retirement years. The National Pension System is a retirement savings programme backed by the government that can be an effective resource for retirement planning. By making contributions to the NPS, people can take advantage of tax savings and the potential for long-term growth of their investments through expert management by registered pension fund managers. In this article, Henil Shah details the fundamentals of the NPS, including how it operates and how investing in it can lead to a monthly pension of Rs 1 lakh.

Retirement is a time of life that holds both excitement and uncertainty. It marks the end of one chapter and the beginning of another, with new possibilities and adventures on the horizon. However, the prospect of retirement can also be daunting as it requires careful planning to ensure financial stability and security in the years to come. That’s why retirement planning is a smart move. By taking the time to map out your financial future, you can enjoy the fruits of your hard work and live your retirement years with confidence and peace of mind. Retirement planning is an essential aspect of personal finance that enables individuals to prepare for their golden years and achieve financial independence post-retirement.

Retirement planning involves identifying and setting aside sufficient funds to meet the individual’s expenses and maintain their desired standard of living during retirement. It is not limited to individuals approaching the retirement age. In fact, it is advisable to start planning for retirement early in life to ensure that sufficient time is given for your investments to grow and compound. The power of compounding can help individuals accumulate wealth over time, and small investments made early in life can result in significant corpus at retirement. Moreover, retirement planning is not a one-time event but a continuous process that requires periodic review and adjustments based on changes in the individual’s financial situation and life goals. 

As such, it is important to consult a certified financial planner to guide you through the retirement planning process and ensure that your investments align with your financial goals. In today’s dynamic economic environment, retirement planning has become more critical than ever before. It can help individuals achieve financial independence, maintain their desired standard of living, and enjoy their golden years without financial stress. One of the best ways to plan for retirement is by investing in the National Pension System (NPS). This is a government-sponsored pension scheme that allows individuals to build a retirement corpus and earn a regular pension after they retire.

Understanding NPS

The National Pension System (NPS) is a defined contribution pension scheme that was launched by the Government of India in 2004. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers individuals an easy and affordable way to save for their retirement. Here are some key points you need to know about the NPS:

Eligibility — Anyone between the ages of 18 and 65 can join the NPS. The minimum contribution amount is ₹500 per month or ₹6,000 per year. 

Types of Accounts — The NPS has two types of accounts: Tier I and Tier II. Tier I account is a mandatory account that is designed for long-term retirement savings. It does not allow premature withdrawals before the age of 60, except for specific cases such as critical illness or death. The contributions made to the Tier I account are tax-deductible under Section 80C of the Income Tax Act, up to a maximum of ₹1.5 lakhs per year. The interest earned and the final pension amounts received are exempted from tax. The Tier II account is a voluntary account that offers greater flexibility and can be used for short-term savings goals. Unlike the Tier I account, it allows withdrawals without any restrictions, and there are no penalties for premature withdrawals.

However, contributions made to the Tier II account are not eligible for tax deductions under Section 80C. The interest earned on the Tier II account is taxable, but the final withdrawal amount is tax-exempt if held for at least three years. It's important to note that to open a Tier II account, you must have an active Tier I account. Therefore, the Tier I account is the primary account designed for retirement savings and offers several tax benefits, while the Tier II account can be used for other short-term goals that may require liquidity. Ultimately, both Tier I and Tier II accounts aim to provide you with funds during your retirement years.

Investment Options — NPS also offers a choice of investment options to investors. There are two choices, active and auto. Active choice allows investors to choose their own asset allocation and decide on their investment strategy. In contrast, auto choice invests in a pre-defined mix of equities, corporate bonds and government securities based on the investor’s age. This choice of investment options enables investors to balance their risk and return based on their investment goals and preferences.

Tax Benefits — NPS provides tax benefits under Section 80 CCD(1) and 80 CCD(2) of the Income Tax Act. As per Section 80 CCD(1), an individual can claim a deduction of up to 10 per cent of their salary (basic pay + dearness allowance) for contributions made towards the NPS. Additionally, under Section 80 CCD(2), an employer’s contribution to the NPS up to 10 per cent of the employee’s salary is also eligible for tax benefits. 

Withdrawals — Partial withdrawals are allowed from the NPS account after completion of three years from the date of opening the account, subject to certain conditions. On retirement, at least 40 per cent of the corpus needs to be compulsorily used to purchase an annuity, which provides a regular income to the investor for life.

Obtaining Optimal Pension via NPS

To earn an optimal pension with NPS, you would need to accumulate a substantial retirement corpus during your working years. Here are some steps you can take to achieve this goal:

Start Early — The key to building a substantial retirement corpus is to start investing early. The earlier you start investing in NPS, the more time your money has to grow. By starting early, you can benefit from the power of compounding, which can help your money grow exponentially over the long term. 

Invest Regularly — To build a sizeable retirement corpus, you need to invest regularly in NPS. You can choose the auto debit option to ensure that your contributions are made on time. Regular investments can help you accumulate wealth over the long term and reduce the impact of market volatility on your portfolio.

Choose the Right Investment Mix — NPS offers different investment options with varying degrees of risk and returns. You can choose between three different investment options – equity, corporate bonds and government securities.You can also choose between two different types of NPS accounts – Tier I and Tier II. Tier I accounts are designed for long-term retirement savings while Tier II accounts offer greater flexibility and can be used for short-term savings goals.

Maximise Contributions — NPS allows you to contribute up to 10 per cent of your salary, subject to a maximum of ₹2.5 lakhs per year. This limit is the combined limit for contributions to Tier I and Tier II NPS accounts. Maximising your contributions will help you accumulate a larger corpus. You can also make additional contributions to your NPS account to take advantage of tax benefits. 

Stay Invested — NPS is a long-term investment and it is important to stay invested for the long haul. Avoid withdrawing your money prematurely as it will impact your retirement corpus. Instead, stay invested and let your money grow over time. 

Earning ₹1 Lakh Monthly with NPS

Assuming an average annual return of 10 per cent, you would need to accumulate a corpus of approximately Rs 1.24 crore to generate a monthly pension of Rs 1 lakh for the rest of your life,from the age of 60 to 100 years. However, if we assume inflation to be 7 per cent, you would need to accumulate a corpus of around Rs 2.91 crore, keeping other things constant. Having said that, this is just a rough estimate and the actual amount may vary based on several factors such as your age, retirement age, investment mix and returns. It is important to consult a certified financial planner to create a personalised retirement plan that suits your needs and goals.

Final Thoughts

In conclusion, the NPS is a robust and reliable pension scheme that offers a sustainable and long-term retirement solution for all Indian citizens. By offering flexible investment options, tax benefits and a choice of fund managers, the NPS provides a comprehensive retirement planning tool that can help individuals achieve their financial goals and secure their future. Whether you are a salaried employee, self-employed professional or an entrepreneur, the NPS is an ideal retirement planning tool that can help you plan for a financially independent and fulfilling retirement. So, if you haven’t already invested in the NPS, consider doing so today and take the first step towards securing your financial future. Earning a pension of Rs 1 lakh per month with NPS requires discipline, patience and a long-term investment strategy.