Planning for retirement is prudent, and the National Pension System (NPS) offers a tax-efficient avenue for building a retirement corpus. Along with the flexibility to decide the allocation of contributions across different assets, the NPS allows for an additional tax deduction of Rs 50,000 under Section 80 CCD (1B ) of the Income Tax Act, which is over and above Rs 1.5 lakh deduction under Section 80C. Let’s delve into the specifics and see how much pension a 30-year-old investing Rs 50,000 annually in NPS for tax-saving purposes might earn upon reaching the age of 60.
But first understand that at 60 an NPS subscriber is required to utilise at least 40% of the accumulated corpus to purchase an annuity from a life insurance company. The remaining 60% can be withdrawn as a lump sum, which is exempt from taxation. You also have the option to not withdraw and take 100% annuity on retirement at 60.
“If you consistently invest Rs 50,000 per year for the next 30 years, your initial investment of Rs 15 lakh will grow into a substantial corpus of Rs 1.10 crore. At this point, you have two primary options to consider: purchasing an annuity or taking the lump sum withdrawal. If you go for 100% annuity then pension will be higher than what you will get under the 40% option,” said Sushil Jain, CEO, PersonalCFO.in.
Here is how it works:
40% Annuity Purchase
Using 40% of the accumulated corpus to purchase an annuity would provide you with a guaranteed regular income post-retirement. With an estimated corpus of Rs 1.10 crore, this translates to approximately Rs 29,455 per month. This annuity ensures a stable source of income, allowing you to maintain your financial independence in your golden years. However, if you delay investing and start investing at 40 then over the next 20 years your investment amount will reduce to Rs 35.63 lakh which will offer you Rs 9,502 pension as against Rs 29,455 discussed above. That’s the power of compounding.
Taking 100% Annuity
Alternatively, you can choose not to take any lump sum at 60 and instead receive the entire amount as pension. In this scenario, the monthly pension would amount to around Rs 73,637. While this offers a higher monthly pension, it comes with the responsibility of managing your finances during emergencies.
If you delay investing and start investing at 40 then over the next 20 years your investment will reduce to Rs 35.63 lakh which will offer you Rs 23,755 pension as against Rs 73,637 discussed above.
You also have the option to defer the lump sum withdrawal until the age of 70. However, during this period, you need to allocate at least 40% of the corpus towards purchasing an annuity. In case of an early exit before turning 60, only up to 20% of the NPS corpus can be withdrawn as a lump sum. The remaining 80% of the corpus must be utilized to purchase an annuity, which guarantees a regular income during retirement.
“NPS provides a flexible and tax-efficient avenue for building a retirement corpus. By investing Rs 50,000 annually over the next 30 years, you stand to accumulate a decent amount but that might not translate into a comfortable pension during your retirement years. Hence, for a higher pension you should consider increasing the investment amount,” said Jain.
Whether you choose the stability of an annuity or the flexibility of a lump sum withdrawal, the NPS empowers you to tailor your retirement income strategy to suit your financial goals and preferences. Start planning early, and with prudent investment decisions, you can look forward to a secure and fulfilling retirement journey.
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