NPS Investment: How Much Should One Invest To Get Over 1 Lakh Pension Per Month? When an investor invests in NPS, her savings are pooled into a pension fund which is invested by PFRDA regulated professional fund managers
By Abhinav Angirish •
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Many Indians rely on National Pension Scheme (NPS) for their retirement planning. NPS is a social security initiative undertaken by the central Government with an aim provide a steady income for individuals after retirement.
It is common knowledge that the value of money gets eroded over the period of time. For example, if someone is 25 years now, and his monthly expenses are INR 20,000, assuming that he will retire at the age of 55, he will require INR 114,870 to maintain his present lifestyle.
The good news is that with proper financial planning it is possible to get a pension of INR 1 lakh per month. Investing in NPS also has tax benefits. A person investing in NPS can claim exemption up to INR 2 lakh in a financial year: INR 1.5 lakh can be claimed under Sec. 80CC and INR 50,000 can be claimed under Sec. 80 CCD of the Income Tax Act, 1961.
When an investor invests in NPS, her savings are pooled into a pension fund which is invested by PFRDA regulated professional fund managers. The money is invested in government bonds, bills, corporate debentures and shares. These investments continue to grow over the period of time.
At the time of account opening, the investor is given two options: Active and Auto mode. Apart from this, he has to specify the maturity amount to be invested in annuity. The percentage of annuity decides the amount of pension he will get. For example, someone aged 25 years invests INR 10,000 in NPS for the period of 35 years (assuming he retires at the age of 60) and decides to invest 100 per cent in an annuity, he will get INR 191,414 as pension. Alternately if he invests 40 per cent maturity amount towards annuity, he can expect INR 76,566 as pension. Thus, the higher the amount invested in an annuity, the higher the pension.
Ideally, one should invest 60 per cent of the maturity amount in annuity and use the balance of 40 per cent for emergencies. This will help them tide over emergencies while earning a decent pension that will allow them to live with peace of mind. If the person maintains a debt: equity ratio at 40:60, it will allow him to earn a 10.4 per cent return per year which is sufficient to beat the inflation.
However, the NPS corpus amount limit has been raised to INR 5 lakh. This means that if the person's NPS corpus is less than INR 5 lakh he can withdraw the entire amount without investing in an annuity. Earlier this limit was INR 2 lakh. Even entry age has been expanded, from 18 to 65 years bracket it has now been expanded to 18 to 70 years with those joining after 60 being allowed to stay invested till the age of 75.
However, there is a catch. NPS has regulations regarding the equity percentage especially if invests through active mode. Since equities are risky, the maximum permissible percentage decreases with the increase in the age of the investor. For example, an investor can invest up to 75 per cent in equity till 50 years of age, thereafter the ratio decreases. For a person who is 60-plus the maximum permissible limit to invest in equities has been fixed at 50 per cent of the corpus.
The complete amount which you withdraw a lump sum and the amount which you use to purchase an annuity, both are tax-free. However, the monthly income which you receive as a part of the annuity plan is taxable as your normal tax slab for that year.
Is Premature Withdrawal Allowed in NPS?
Premature withdrawal from NPS is allowed if certain conditions are met.
- The NPS account must be three years old
- A person cannot withdrawal more than 25 per cent of the tota contributions made at a time
- Premature withdrawal can be done only three times before superannuation
- Ony specific reasons are allowed for pre-mature withdrawal, like higher education of children, the marriage of children, treatment of some critical illness, purchase or construction of resident property, among others
However, if you are young and have time by your side, you can also consider investing some amount in equity mutual funds. A SIP of INR 10,000 a month for 30 years can fetch you INR 6.92 crore at the time of retirement. Equities have delivered returns between 15 per cent and 18 per cent per year for the past decade. With the Indian economy on the fast track to growth, it makes sense to remain invested in equities that offer above-average returns in the long run.
Retirement planning is a complex exercise. There are several factors that influence investment decisions. Hence, it is advisable to seek the guidance of qualified finance professional.
