Even though NPS is a product designed exclusively for retirement planning, what attracts most people to NPS is Rs 50,000 extra tax benefit it offers via deduction.
As per the current tax rules (2019-20), there is an additional Rs 50,000 tax deduction available under Section 80CCD (1B) for NPS contributions made in NPS (Tier 1). This benefit is only available to NPS subscribers and most importantly, is available in addition to the Rs 1.5 lac deduction available under Section 80C.
And this extra Rs 50,000 tax deduction for National Pension Scheme NPS is what catches most people’s interest. And such people keep looking for easy-to-use NPS calculators.
But before we find out the details of NPS pension calculations, let me remind here that ideally, investment decisions should be governed by real financial goals and not tax-saving alone (read why?). But most people ignore this important advice and get attracted / give undue importance to things like tax-saving. But let’s not get into that discussion today.
To summarize the tax angle of NPS, investments of up to Rs 50,000 in NPS Tier I account in a financial year qualify for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This is in addition to the Rs 1.5 lac deduction available via Section 80C.
Now as mentioned earlier, this extra 50,000 NPS tax benefits attracts many.
And I regularly get queries from people, which are broadly like:
“I already utilize my Section 80C limit of Rs 1.5 lac using EPF, PPF vs ELSS, Home Loan EMI Principal repayments, etc. But I want to save more tax. So can I also use NPS for extra tax savings? And if I do, what would be my final retirement corpus and pension if I put just the additional Rs 50,000 every year in NPS?”
Though suitability of NPS for retirement planning is something worth debating, let’s just limit the scope of this article to answer the question below:
What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?
Before we run the numbers and kind of simulate the NPS Pension Calculator, we need to understand the latest NPS withdrawal rules (2019):
- Minimum 40% of the NPS maturity proceeds (corpus) must be used to purchase an annuity plan. This 40% isn’t taxed. But, the income (or pension) generated from the annuity will be taxed at the then tax slab rate of the retiree.
- The remaining 60% is exempt from tax and can be withdrawn as lumpsum.
- If they want, then NPS retirees can use more than 40% (up to 100%) of the NPS corpus to purchase the annuity. In that case, the lumpsum available will decrease accordingly. For example – one may choose to purchase the annuity plan using 65% of the NPS corpus on retirement (instead of the required minimum of 40%). He will then only get remaining 35% as a one-time lumpsum tax-free payout.
So according to NPS rules, basically, there is no tax at the time of withdrawal at retirement as i) 40% goes towards annuity purchase tax-free and ii) remaining 60% is paid out immediately as a tax-free amount. The only time any tax has to be paid is on the income being generated from the annuity in later years.
That was about NPS income tax benefits, NPS tax saving and NPS tax exemption. Now let’s come back to the question at hand:
What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?
Before we do NPS calculations for 2019, let’s make a few assumptions:
- NPS Starting Age – 25 / 30 / 35 / 40
- Retirement Age – 60
- Investment Tenure – 35 / 30 / 25 / 20 years (as starting age is different but retirement fixed at 60)
- Annual NPS investment – Rs 50,000 only
- Does investment amount increase every year – No
- Expected Returns – 10% (assuming a balanced mix of equity and debt)
- Part of corpus used for Annuity purchase on retirement – 40%
- Part of corpus used for Lumpsum Payout – 60%
- Annuity Rate at time of retirement – 6%
So here are the results of calculating NPS maturity calculator and pension:
Start at 25 and Retire at 60 (35 years tenure)
- Total Contribution – Rs 17.5 lac
- Total NPS Corpus – Rs 1.49 crore
- 40% used for Annuity Purchase – Rs 59.6 lac
- 60% Lumpsum Tax Free Payout – Rs 89.4 lac
- Monthly Pension from Annuity – Rs 29-30,000 per month (before taxes)
Start at 30 and Retire at 60 (30 years tenure)
- Total Contribution – Rs 15.0 lac
- Total NPS Corpus – Rs 90.5 lac
- 40% used for Annuity Purchase – Rs 36.2 lac
- 60% Lumpsum Tax Free Payout – Rs 54.3 lac
- Monthly Pension from Annuity – Rs 18,000 per month (before taxes)
Start at 35 and Retire at 60 (25 years tenure)
- Total Contribution – Rs 12.5 lac
- Total NPS Corpus – Rs 54.1 lac
- 40% used for Annuity Purchase – Rs 21.6 lac
- 60% Lumpsum Tax Free Payout – 5 lac
- Monthly Pension from Annuity – Rs 10-11,000 per month (before taxes)
Start at 40 and Retire at 60 (20 years tenure)
- Total Contribution – Rs 10.0 lac
- Total NPS Corpus – Rs 31.5 lac
- 40% used for Annuity Purchase – Rs 12.6 lac
- 60% Lumpsum Tax Free Payout – Rs 18.9 lac
- Monthly Pension from Annuity – Rs 6300 per month (before taxes)
Note – These numbers are indicative, based on an assumed constant average rate of return of 10% and annuity rate of 6% (which may not actually remain constant). The actual returns, final NPS pension, final lump sum amount one gets from NPS may be higher or lower. Also, you never know whether the 80CCD deductions will remain until your retirement or not.
And it’s pretty obvious that to make the most of the NPS (like in many other long term investment product too), the subscriber should ideally start investing as early as possible. And if one increases the annual (or monthly) contribution towards NPS every year (in line with the increase in income), then that would make the final NPS Retirement Corpus even bigger.
So now you have your answers to questions like what would be final NPS retirement corpus and monthly pension (income) in retirement years.
Before 2004, the government employees were eligible for pension under the Old Pension Scheme (OPS) system. Under this scheme, the pensioner used to get a starting pension of 50% of the last drawn salary. This was a defined benefit system, unlike NPS which is a defined contribution system. Do check the difference between NPS and OPS to know more.
By the way, many people do compare NPS with PPF. But PPF is a pure debt product which too can be used to achieve goals like PPF crorepati if nothing else. But jokes apart, NPS is a hybrid equity-debt product and PPF is pure debt. So ideally, they shouldn’t be compared. Read more about PPF here and if you want, try your hands at this PPF calculator as well.
All said and done, National Pension System or NPS is designed to save for the post-retirement years, by making contributions during the working years. But is it the best-suited product for retirement saving or not? The answer isn’t that easy.
It may be suitable for some people and it may not be suitable for many others.
Many people’s retirement plans are best served via simple SIP in Equity Funds, regular EPF contributions and occasional Debt Funds (for rebalancing, etc.). And if the money being saved monthly towards retirement is high, then Rs 50,000 NPS tax rebate doesn’t seem that attractive for them.
Like a true retirement product, NPS is very illiquid and it’s difficult to take out money before you turn 60 (i.e., retirement age). So for those planning early retirement, it might not be the best option. More so because if you quit NPS before turning 60, then the NPS Rule’s original condition of using 40% corpus for annuity purchase changes to 80 percent! That is, you would compulsorily need to purchase an annuity plan using 80% of your NPS savings. And only the remaining 20% will be paid as a one-time payout. That’s kind of unfair to early retirees!
So no doubt the 80CCD deduction gives you additional tax benefits for investing Rs 50,000 in NPS National Pension Scheme. But NPS tax benefit and tax-saving are one thing and product suitability is another. And whether NPS is actually suitable for you as a retirement savings product or not – is another matter altogether.
Note – If you want to find out your NPS retirement corpus and NPS monthly pension, then go ahead and Download FREE Excel-based NPS Pension Calculator.
Many financial bloggers have trashed NPS on the grounds of liquidity. While tax saving shouldn’t be the main purpose behind investing, I don’t see a problem if that motivates people to invest for their retirement. Let’s face it, we don’t live in an ideal world and no amount of financial education can motivate people to save for retirement but tax saving is something everyone is interested in. Nobody wants to give the government a penny and I can’t say I blame them.
Now coming to liquidity. Yes, NPS is illiquid but for people investing 3-5 lakhs a year in various instruments, investing 50k in NPS shouldn’t be a big deal. They can use their more liquid investments prior to 60 to fulfil various goals and set aside NPS corpus for use after they turn 60. Even if somebody retires early, he will need some money after 60 and that is where NPS comes in.
For those planning to retire early, a mix of NPS and PPF in their portfolio will be really helpful to them as they can use the PPF corpus before 60 and NPS after 60. This way they can take all the tax benefits and build a sizable retirement corpus too. Now that equity LTCG is taxable at 10%, the tax free nature of NPS cannot be ignored any longer I feel. Getting 1 crore+ amount tax free at retirement age can be a life saver.
Not having liquidity is the main advantage for any retirement product. We know what our people will do if liquidity option is given. We swallow that amount and stay naked during retirement. Please consider a normal middle class man, what risk free or minimum risk avenues he has to invest, he doesnt know about equity, he invests in some MF based on someone recommendation and loses his most of his money, or dont plan at all. FD, Post office all are taxable. Debt market, no one understands.
Few things on NPS here, The expense ratio is extremely low in NPS when compared to MF. The investment returns mentioned has 10% by your increases by 2.5% to 12.5% because of the tax saving you get every year. On average we can expect 12.5% from a EEE product and no other investment vehicle is like this in India. The fund house can invest only in top 500 companies.
If the company is registered with NPS, the investment limit can be further increased by another 10% of basic.
Yes, the 40% annuity corpus which i dont like but annuity products are also evolving with money return to nominee, etc..
Not all the money should be parked with NPS. But use the maximum tax benefit from NPS/
I agree that not having liquidity can actually be an advantage for retirement products. So many times I have seen how the sole breadwinner of the family is forced to take money out of his retirement fund to spend on frivolous activities and stuffs because of emotional blackmail by family members.
We also cannot forget that most people are not disciplined investors. They will pull money out of the equity markets if they see a crash like the one in 2008. So a lock-in the only way to ensure these people stay invested no matter what.
The mandatory lock-in till retirement actually protects the investor from spending his retirement money prior to retirement.
I have an unrelated question (or perhaps related).
Under 80C, if I max out 1.5 Lac limit through EPF, ULIP etc., can I still invest in PPF? I understand that I will not get tax exemption at “entry” i.e. my contribution to PPF will not be tax deductible, but can I still put money in and get the tax exemption at “exit” [+ the security and general higher rate of return compared to FD].
I already have a PPF so keep it active I have already contributed 1k for the fiscal year in April.
Thanks in advance.
I discovered your site today. Love the articles, especially the comparison of P/E for nifty, as well as earnings from investing at different pe levels.
This article is great. I always thought NPS was a lousy investment. But your calculations gave me a thought and it would be great of you could have a look at the calculations below.
NPS Returns Reframing for those in 30% tax bracket:
Can we relook the returns from NPS in.the light of tax savings for ppl in the 30% bracket (while keeping the assumptions for your calculations unchanged). I just want your opinion on this alternate view of the returns:
Taking case 2: investing starts from age 35:
Annual investment = 50000
Annual net investment (after tax saving) = 33,333 (approx – for ppl in too bracket)
Total investment = 12.5 lakhs
Hence total net investment = 8.1 lakhs (after tax savings)
So amount available at 60 years as lump sum = 33 lakhs
Hence xirr on this amount alone with investment of 8.1 lakhs over 25 years= 9.5%
Now considering annuities might give only 4% vs other available sources which might give up to 8%, if I consider the value of the remaining 21.6 lakhs as actually half or 11 lakhs.
Then the value of my corpus would be approx 33+11= 44 lakhs.
So basically 8 lakhs investment is giving a return of 44 lakhs in 25 years or an xirr of 11%.
I would love it if you would critique the same.
Thanks in advance,