NPS is a long-term commitment, there are tax benefits and you can choose an investment option based on how much market risk and fluctuations you are willing to handle.
For a financially safe and smooth retirement, there are various investment instruments that one can look at, starting from real estate, mutual funds, and stocks, to NPS, EPF, etc. Even though all of these are the most common retirement instruments, according to experts, the National Pension Scheme (NPS) is one of the best investment tools for retirement planning in India.
PFRDA (Pension Fund Regulatory and Development Authority) and the Government of India offer the National Pension Scheme (NPS). This was previously a scheme from which only government employees could benefit, but now the pension plan has been opened for all citizens voluntarily. It is a stable saving against your retirement and you will have to invest in your NPS fund only till the age of 60. The entire corpus (amount accumulated along with interest) will support you once you are retired.
Ajit Kumar, Chief Strategy Officer, KFintech, says, “NPS can help you have a secure future after retirement and with the right knowledge and awareness, you may receive a monthly pension of Rs 50,000.”
The amount to be invested as per each age group to generate a 50K salary
The NPS investment plan must be considered if you want to save money during your earning life and want to receive a fixed pension after retirement. There are two ways to invest – Active and Auto choice.
Kumar explains, “There are various asset classes like equity, corporate bonds and government securities among which one can split one’s deposits. In the case of active choice, the investor has more control of asset allocation and funds, whereas, in the case of auto choice, the manager allocates assets on the investor’s behalf.”
How to use the NPS calculator?
The NPS calculator helps you calculate your savings to receive a pension of Rs 50,000 after retirement for a lifetime. “One can use the calculators available online and on various websites to estimate one’s future monthly pension,” adds Kumar.
To use the NPS calculator you need to enter details, such as –
- Select the ‘Investment Type’, whether a monthly or yearly investment.
- The amount you want to invest.
- Your current age, to determine the tenure of investment.
- Returns that you expect from your NPS investment.
- The percentage of annuity to purchase.
Kumar points out, “On maturity of one’s investment at 60 years of age, a part of the sum is reinvested to provide the investor with a monthly annuity. He/she can reinvest the 40 per cent, not less than that. However, in case one chooses to exit the scheme, he/she will have to reinvest 80 per cent in annuities. If the investor wants to withdraw before that, it cannot be below 80 per cent.”
He further adds, “The calculator is efficient and accurately calculates the amount that one will get after retirement. It helps one to plan one’s finances and have a clear idea of the amount of investment needed, beforehand.”
Tax Savings on Investment
The tax benefits under NPS are different from other retirement investments. If you want to generate extra income to meet your financial goals, experts say the tier 1 account of NPS will be beneficial.
Kumar explains, “Under Section 80C, the deduction limit is Rs 1.5 lakhs, under Section 80CCD (1B) NPS investors receive an additional tax benefit of up to Rs 50,0000 over and above the previous and under Section 80CCD (2) government employees can claim a 14 per cent salary tax deduction and private sector employees get 10 per cent of their salary.”
Should you opt for Lump-sum withdrawal in NPS?
An investor can withdraw up to 60 per cent of the total corpus but he/she will mandatorily have to subscribe to an annuity plan with the remaining 40 per cent.
Kumar points out, “This is to ensure that the investor has a stable source of monthly income for the rest of the life. While one may utilise 60 per cent of the corpus, the minimum 40 per cent for the annuity scheme is for his/her future security.”
NPS is an investment scheme that helps you achieve your financial goals; it provides a certainty of income post-retirement. NPS is a long-term commitment, there are tax benefits and you can choose an investment option based on how much market risk and fluctuations you are willing to handle.