Everyone wants a financially secure and stable life after retirement, as those are the days when most people enjoy what they missed out on to earn a living earlier. However, having a secure and stable retirement requires a lot of planning for it. National Pension System (NPS) can help in this if you opt for it and start saving for your retirement using this scheme as early as possible.
This article will guide you about the NPS scheme, its eligibility, how can you earn Rs. 50000 approximately every month as a pension after retirement with this scheme, and tax saving opportunities with NPS.
What is NPS?
NPS or National Pension System, is a central government and Pension Fund Regulatory and Development Authority (PFRDA) scheme. This was introduced to offer people a scheme that can generate higher returns than other pension schemes but also carry lower risk and offer a stable source of income for retirees.
This is a market-linked scheme, where the money you invest is an investment in different investment instruments in the stock market and the returns are as per the market performance. While it is a market-linked scheme, since the government and PFRDA are involved, the risk factor is quite lower than other market-linked instruments and schemes.
Who can opt for NPS?
NPS is for all, whether you are a government employee, state or central, private organizations employee, or any other occupation, all you need to be is a citizen of India, and NRIs are also eligible for the scheme. The applicant’s age for NPS has to be within the range of 18 to 70 years. Finally, the applicant must be compliant with the KYC verification, and then only his or her NPS account will be opened.
How can you earn Rs. 50000 per month with NPS after retirement?
Every person has different living standards, and their need for living expenses are also different. However, on average, a house in India can run smoothly with Rs. 50000 in a month. So, taking this amount as an average corpus that people who open an NPS account would want, let’s see how they can generate this Rs. 50000 after retirement.
Suppose you are starting your investment in the NPS account today when you are at the age of 25 years. You invest Rs. 5000 per month till the age of 60 years, which is 35 years in total. Now assuming you choose the moderate rate of return, which is around 12% in the NPS scheme, you can accumulate Rs. 3.25 crores. Suppose you withdraw Rs. 1.95 crores as a lump sum which is 60% of the total amount accumulated, then the remaining 40% is reinvested in the annuity plan, so then you can generate Rs. 71,476 per month from the annuity, which is even more than your target of Rs. 50000. You can find all these out using the NPS Calculator easily.
How to save taxes with NPS?
While people are more interested in the NPS scheme because it helps them save for life after retirement, one thing many overlooks is the current NPS tax benefits. Yes, if you invest in NPS, you can get multiple deductions which can reduce your tax liability.
- Under section 80 CCD (1), any amount contributed to NPS can be claimed as a deduction.
- Under section 80 CCD(2), even the amount contributed by the employer for the employee can be claimed as deductions by the employee. For government employees, the deduction is available with the capping of 14% of the salary, while for private companies’ employees, it is 10%.
- Under section 80CCD(1B), any self-contribution towards NPS can be claimed as deductions from total income.
One thing here you need to understand is that the maximum deduction you can claim is Rs. 150000 under section 80C, which includes sections 80 CCD (1) and 80 CCD (2), and separately Rs. 50000 under section 80 CCD (1B). Also, these deductions are available for Tier I contributions only.
Conclusion
To conclude, NPS can not only help you plan your retirement well, and become financially stress-free, but it also helps in saving taxes, which, if you reinvest in the scheme, can generate more returns. So, NPS works like a two-way sword for every investor.
