Use NPS to Build a Healthy Retirement Corpus (India)
While retirement offers the freedom to do what you want, pursue your hobby, and relax, it also comes with some woes. When you retire, your regular income stops, however, your regular expenses remain the same and increase due to inflation, and also one major factor is medical expenses for the elderly. However, these pains of retirement can be taken care of with a little bit of planning. One of the most popular ways of planning your retirement is by investing in a pension scheme and when you have a government-run pension, scheme why would you look otherwise, isn’t it?
What is National Pension System (NPS)?
National Pension System is a government-run combined scheme for pensions as well as investments. It was launched by the government to secure life after retirement and provide financial stability and security to elderly people. NPS provides market-based returns and offers great returns over the long term. The best part about this scheme is that upon maturity, a lump sum amount is provided to the account holder as well a regular pension is provided. This helps a lot in keeping financial stress at bay for the elderly retired individuals.
How does it work?
You can open start investing in NPS with just Rs. 500 while there is no upper limit on the investment. Your invested amount is handled by the fund manager and accordingly distributed amongst equity, government securities, and corporate bonds. However, you can also choose to distribute the amount by yourself as per your particular investment goals. You can invest starting from the age of 18 years and it is available for all the citizens of India. You can invest till the age of 60 years. At the age of 60, you can withdraw 60% of the accumulated amount in the account, and the remaining 40% you can enjoy life long as a monthly pension. The return generated by this scheme will depend on the return generated by the underlying assets of the fund.
How much can you accumulate with NPS for retirement?
Since NPS is a market-linked investment and pension scheme, it offers comparatively higher returns than other pension and fixed income schemes like FD, PPF, or NSC. The amount you can accumulate will depend on the amount you invest in the scheme. You can find out how much you can accumulate using the NPS calculator.
Suppose you start investing in from the age of 25 years and invest Rs. 5000 every month via the SIP facility for NPS. You choose a moderate investment strategy where the average investment return rate is 12%. So when you will be 60 years old, the corpus you can accumulate is Rs. 3.25 crores. Your total investment is only Rs. 21 lakhs over 35 years. You can change the investment strategy if you want aggressive returns, and you can increase or decrease the amount of investment as well and check the return accordingly.
So, if you take this example, then at 60 years, you can withdraw 60% of Rs. 3.25 crores which are Rs. 1.95 crores and the remaining Rs 1.3 crores will be divided into a monthly pension and get credited to your bank account every month.
Benefits of NPS
There are multiple tax benefits of using NPS for retirement planning, here are some of the vital ones –
- It is regarded as the world’s cheapest retirement plan, you can invest from Rs. 500 and the annual fees are as low as 0.02% of the investment value.
- You can invest in it from the age of 18 years and until you are 65 years. So the horizon is huge and you can accumulate a huge corpus even by investing a nominal amount every month.
- The NPS scheme is managed by fund managers who have experience and knowledge of handling mutual funds, and other investments for years. Moreover, you can also choose the percentage of allocation of your investment in different categories.
- The 60% lump sum withdrawal benefit helps in fulfilling many financial goals like the marriage of your child, or their higher education.
Apart from the above-mentioned benefits, there are multiple tax benefits of investing in NPS –
- You can save up to Rs. 15600 on investing Rs. 50000 per year in this scheme as per Section 80 CCD (1B) of the IT Act and as per the recent tax regime.
- Similarly, you can save Rs. 46800 per year on investment up to Rs. 1.5 lakhs in NPS under section 80 CCD (1). This is an alternative to section 80C.
- Moreover, the maturity amount and the return generated on NPS are tax-free.
If you want to have a stress-free retirement life, you have to start planning it as early as possible and you can use NPS as one of the legs of your retirement planning with the NPS calculator, you can easily find out how much you can accumulate over the years.