National Pension System (NPS) also commonly known as the National Pension Scheme is emerging as a popular investment-cum-retirement product. According to experts, the NPS encompasses all the desirable attributes of a retirement savings product: it offers long-term investment potential with minimal costs and a low-risk profile. So what are the benefits of NPS? How much retirement corpus will you get with NPS and what will be your monthly pension? Can you become a crorepati by investing in NPS? We take a look at top 10 things you should know about NPS, NPS calculator, scheme details, returns etc. (AI image)
NPS is a market-linked voluntary contribution scheme designed to assist individuals in saving for retirement. This scheme is seen by experts as an effective investment for enhancing retirement income. Introduced by the Central Government, NPS aims to provide individuals with a pension income to support their retirement needs. (AI image)
The NPS voluntary model is accessible to all Indian citizens, including those residing abroad, aged between 18 and 70 years. You can open an NPS account online via the eNPS portal. The option to open an NPS account remains available until the age of 70, with the possibility to continue contributions until the age of 75. (AI image)
NPS Calculator: If one were to assume that you start investing in NPS at the age of 22 with Rs 10,000 per month contribution, and invest up to an age of 60 years. The total years of your contribution would be 38. We have taken an expected return on investment of 10%, with annuity purchase at 40% and annuity rate of 6%. In such conditions, your total retirement corpus would exceed Rs 5 crore with an investment of over Rs 45 lakh. Your expected monthly pension would be over Rs 1 lakh. The example above is for representative purposes only. Each individual’s corpus will vary depending on the contributions, returns etc.
NPS scheme is structured into two tiers. Tier-I Account serves as the primary retirement account where the regular contributions made by the subscriber and/or their employer are credited and invested based on the scheme/fund manager selected by the subscriber. The minimum contribution required to open this account is Rs 500, with a minimum annual contribution of Rs 1,000. (AI image)
NPS Tier II Account: This is an optional withdrawable account that can be accessed only if you have an active Tier I account. Withdrawals are allowed from this account as needed. The minimum contribution required to open this account is Rs 250, with no restrictions on the minimum contribution per year. (AI image)
Under the NPS, there are four asset classes: Asset Class E, comprising Equity and related instruments; Asset Class C, consisting of Corporate debt and related instruments; Asset Class G, encompassing Government Bonds and related instruments; and Asset Class A, which includes Alternative Investment Funds such as CMBS, MBS, REITs, AIFs, Invlts, and others. (AI image)
The Tier I option of NPS offers significant tax incentives. Contributions to the scheme qualify for deduction within the overall Rs 1.5 lakh limit under Section 80C. Additionally, there's an extra deduction of Rs 50,000 for contributions under Section 80CCD(1b). This is an exclusive benefit available only to NPS contributors, over and above the Section 80C deduction. (Image source: Freepik)
NPS Lesser Known Tax Benefit: The third method of tax saving through the NPS can significantly impact an individual's tax liability. According to Section 80CCD(2), up to 10% of the basic salary contributed to the NPS is tax-exempt. For instance, if an individual's basic salary is Rs 50,000, their employer can reduce another taxable component by Rs 5,000 and contribute that amount to the NPS on their behalf each month. The total annual contribution of Rs 60,000 to the NPS will reduce the employee's annual tax liability by Rs 18,720, according to an ET analysis. However, this NPS contribution must be included in the individual's emoluments and can only be facilitated through the employer. Notably, this deduction under Section 80CCD(2) is available under the new tax regime as well. (Image source: Freepik)
Investors in NPS now have the option to select from 11 pension fund managers and are permitted to switch their pension fund manager annually. The fund management charges of NPS are significantly lower compared to those of mutual funds and insurance companies. For instance, if you invest Rs 5,000 in an SIP with a mutual fund that charges 2% annually, you would pay approximately Rs 19 lakh in fund management fees over 25 years. Conversely, the same investment in NPS would cost you only Rs 1 lakh over 25 years, assuming the maximum 0.09% fund management charge of NPS. These calculations are based on an assumed compounded annual return of 9%, as per an ET analysis. The lower charges lead to higher returns for the investor.
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