Looking at the rising inflation, it would not be wrong to say that in the coming days, at least ₹ 1 lakh will be needed every month to run the household expenses. In such a situation, it has become very important to arrange money from now to meet your needs after retirement. If you also want to get a pension of ₹ 1 lakh every month after retirement, then you have to invest wisely for this from now on. National Pension System (NPS) is one such effective method, which is capable of giving you a good and fixed pension after retirement.
Why choose NPS only
The question arises as to why we should rely only on NPS for a pension? How does it work? Let us tell you that NPS is a long-term savings scheme run by the Central Government. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It has two types of accounts – Tier-I, which is a mandatory pension account, and Tier-II, which is a voluntary savings account.
Investments made in a Tier-I account cannot be withdrawn till the age of 60. The amount invested is divided into equity (shares), corporate bonds, and government securities. The good thing is that in this, investors can allocate assets as per their choice.
How much investment is required for a pension of ₹ 1 lakh
Now the question is, how much should a 40-year-old person invest from now, so that he gets a pension of ₹ 1 lakh every month after turning 60? If a person starts investing in NPS at the age of 40 and continues investing till the age of 60, i.e., for 20 years, then he will have to create a fund of about ₹ 4.97 crore.
This target is based on the condition that NPS gives an average annual return of 10% and after retirement, the annuity gives a return of about 6%. If you invest ₹65,000 every month and get an average return of 10% on it for the next 20 years, then your total maturity amount will be around ₹4.97 crores. This means that you will have to invest ₹65,000 every month for 20 years.
Tax exemption on investment
NPS also gives tax exemption on investment. Under section 80CCD (1) of the Income Tax Act, you can get a tax exemption on investment up to ₹1.5 lakh in it. This exemption is included in the limit of section 80C. Apart from this, an additional exemption of ₹50,000 is available on investment in NPS under section 80CCD (1B). In this way, by investing in NPS, you can get a total tax exemption of up to ₹2 lakh.
Pension calculation and final amount
As per NPS rules, after retirement, you can withdraw up to 60% of the total deposit amount tax-free. That is, out of ₹4.97 crores, you can transfer ₹2.98 crores directly to your account. The remaining 40% (₹1.99 crores) amount has to be used to buy an annuity plan.
If this amount gets an annual return of 6%, then you can get a pension of about ₹1 lakh every month. The point to note here is that this calculation is approximate. The actual pension amount you get after retirement will depend on the amount you invest, the rate of return, and the annuity plan chosen.
How much money will you get on NPS maturity?
If the total fund is less than ₹5 lakh, then you can withdraw the entire amount tax-free. If the fund is more than ₹5 lakh, 60% of the amount can be withdrawn tax-free, while it is mandatory to buy an annuity for the remaining 40%. The monthly pension received from the annuity will also be taxed as per your tax slab.