NPS: How Rs 10K investment can give you Rs 1.14 lakh monthly income

NPS: When you imagine your old age, what do you think of yourself? 

If it is a picture of enjoying life with complete financial freedom, you have the right goal in mind. 

The thing that you need is how to achieve financial freedom.

The best way to achieve financial freedom at any age is to make the right investments that can help you generate good returns in the long term. 

National Pension System, or National Pension Scheme (NPS) is one such retirement investment option that is aimed at providing a monthly pension post retirement.

The main scheme was started by the central government in 2004, and later on, private players were also allowed to run NPS schemes.

AR Hemant, AVP, Bankbazaar.com says, "NPS is one of the best ways to save for retirement. Your money is split into equity, government and corporate debt, and alternative investments in your chosen proportion and risk appetite. The market exposure helps your money grow in a tax-efficient and cost-efficient manner till the age of 60. More importantly, this instrument ensures that investors have the discipline to stay the course. It’s playing an extremely important role in securing the retirement of working Indians today. There are drawbacks with withdrawal norms which don’t benefit anyone looking at a full withdrawal, and the returns on annuity are low. But one expects these issues will be addressed in the future."

It's a voluntary investment scheme where any Indian citizen between the ages of 18 and 75 is allowed to make contributions. 

Non-resident Indians (NRIs) are also allowed to contribute to NPS. 

NPS Investment Amount

The minimum initial amount to invest in NPS is Rs 500, while one should invest a minimum of Rs 1000 a year. 

However, the government doesn't impose any upper limit. However, the maximum tax exemption that you can get on an NPS investment is Rs 2 lakh.

NPS Tax Benefits

A taxpayer is allowed to get tax benefits up to Rs 1.50 lakh under 80CCD for investment in NPS. However, if one choose Tier-1 account of NPS, they can get tax exemption of further Rs 50,000.

NPS Withdrawal

NPS is a long-term investment scheme where one is allowed to withdraw money at the age of 60 or maturity. 

Though premature withdrawal is also allowed under certain conditions or at the time of death.

If one is withdrawing corpus at the age of 60, they can withdraw a maximum of 60 per cent corpus in a lump sum and have to invest at least 40 per cent into annuities, which ensures a monthly pension to the account holder.

NPS Partial Withdrawal

Tax-free partial withdrawals in NPS can be done only after a lock-in period of three years. 

One can withdraw a total of three withdrawals, up to 25 per cent of the total invested amount.

Partial withdrawal can be done in situations such as children's marriage, higher education, critical illness, the purchase or construction of a house, etc.

NPS Partial Premature exit

NPS allows premature exit, but there is a lock-in period of five years, and one can withdraw only 20 per cent of the total corpus. 

The remaining 80 per cent has to be used to purchase annuities. 

However, if one's total corpus is below Rs 2.50 lakh, they can withdraw 100 per cent of their money.

NPS Death Claims

If an accountholder dies before the completion of maturity/60 years of age, the nominee can withdraw 100 per cent of their corpus.

However, if the accountholder dies after maturity, the legal heir will receive pension/proceeds as per the selected annuity plan.

How Rs 10K investment can help you get Rs 1.14 lakh pension

Since the aim of NPS is to get a monthly pension post-retirement, we need to know our inflation-adjusted expenses at the time of retirement and the monthly investment that we need to make for a pension that can help us afford our lifestyle.

In NPS, even if you invest just Rs 10,000 a month for 30 years, you have a fair chance of getting a pension of over 1 lakh a month at the age of 60.

If you are 30 years old and invest Rs 10,000 a month in the NPS scheme for the next 30 years, i.e. till the retirement age of 60, your total investment in those years will be Rs 3600,000 (Rs 36 lakh). 

If you get estimated returns of 10 per cent in those years, you will get total gains of Rs 19193254 (Rs 1.91 crore) and your total returns will be Rs 22793254 (Rs 2.28 crore).

At maturity, you have Rs 2.28 crore in your hand. 

You have two options here: either withdraw up to 60 per cent the lump sum and invest at least 40 per cent in annuities. 

Or, you can skip withdrawing and invest 100 per cent corpus in annuities.      

When you invest all your corpus in annuities, the government or private agencies invest that money in bonds or debt options where you can get at least 6 per cent interest annually. 

If Rs 2.28 crore are invested in annuities, you will get a monthly income of Rs 1,13,966. 

It means a mere Rs 10,000 investment for 30 years can give you a monthly income of Rs 1.14 lakh. 

How to get Rs 1 lakh monthly income

Given the same conditions as mentioned above, you need to invest Rs 8800 a month for 30 years to get a Rs 1 lakh income. 

Your investment amount in 30 years will be Rs 3168000, your total gains will be Rs 16890063, and your total corpus will be Rs 20058063. 

If your entire corpus is invested in annuities, you will get an estimated monthly income of Rs 100290.