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NPS Rs 50,000 per year – Retirement Corpus & Pension Calculation

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.

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.

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NPS Calculator Excel-based (Free) Download

If you invest in NPS (National Pension System), then I am sure you would be interested in knowing the following:

  • How much money you can accumulate in NPS by retirement?
  • How much NPS retirement corpus will you have?
  • How much tax-free withdrawal is allowed from NPS at retirement?
  • How much will be your retirement NPS pension?

For answering such questions, I have created a small free excel NPS calculator. This NPS calculator acts as a tool that you can use to estimate the NPS retirement corpus and monthly pension when you retire at 60.

You can call it NPS maturity Value calculator or NPS family pension calculator or National Pension Scheme calculator or NPS monthly pension calculator too.

It is a simple, easy-to-use and can be used as a NPS Pension Calculator as well. It’s a basic version and hence, illustrates only the following:

  1. NPS Corpus accumulated by retirement (age 60)
  2. Tax-Free Lumpsum withdrawal available
  3. Pension amount or annuity payable on retirement (after the purchase of annuity using minimum 40% of the NPS corpus accumulated)

Under latest NPS rules 2019-20, you are not allowed to withdraw the entire amount at maturity and need to purchase annuities worth at least 40% of your accumulated NPS corpus at retirement. The remaining 60% of the corpus can be withdrawn tax-free. This annuity purchased is the source of pension income after retirement. Hence, once you are able to estimate your final retirement NPS corpus, you can then easily estimate post-retirement monthly pension using prevalent annuity rates.

So here is the link to download:

Download (Free) Excel NPS Pension Calculator

 

Note – The new pension scheme calculation formula is already embedded in the NPS calculator excel sheet but please remember that the calculations and figures shown by the NPS calculator are indicative only. Is this NPS Tier 1 and Tier 2 calculator? You can say that. Or just assume that Tier 1 (which is locked-in till retirement) is the one being used mostly for actual retirement planning.

This National Pension Scheme Calculator gives a reasonable idea of how much retirement savings can you do using NPS. A lot of people have been looking to download NPS excel calculator and hence, will find this useful as a pension calculator.

As you already know, the government gives extra tax benefits via additional deduction of up to Rs 50,000 per year to NPS investors under Section 80CCD (1B). This benefit is in addition to the Rs 1.5 lac limit of Section 80C.

By investing Rs 50,000 per year in NPS (or less than Rs 5000 per month in NPS), you can create a large enough corpus by the time you retire (assuming you start saving early). And since NPS can give market-based returns if you choose correct asset allocation between Equity, Corporate Bonds and Government Securities, it is a fairly decent product to have in your retirement savings portfolio.

With this NPS calculator, you will know how much Pension and tax-free lump sum amount you will get at retirement at 60.

As for the NPS Calculator Inputs, you need to provide the following:

  • Your current age (assumed you start investing at this age)
  • Retirement Age – fixed here at 60
  • Monthly NPS contribution
  • Annual increase in monthly contributions
  • Asset Allocation of NPS portfolio (to be provided for Equity, Government Bonds and Corporate Bonds)*
  • Starting Corpus if any (if you put lumpsum at the start of NPS)
  • Lumpsum withdrawal at retirement (can be between 0% to 60%)
  • Amount used for Annuity Purchase (can be between 40% and 100%)
  • NPS Annuity Rate % during the post-retirement period

* With regards to the choice of asset allocation in NPS, the NPS has 2 broad Investment options:

Active – Under NPS Active option, you decide how much to invest (exact percentages) in each asset (and their schemes). As of now, there are 4 asset classes:

  • Asset class E – Equity and related instruments
  • Asset class G – Government Bonds and related instruments
  • Asset class C – Corporate debt and related instruments
  • Asset Class A – Alternative Investment Funds

The total allocation across E, G, C and A asset classes must be equal to 100%. And the maximum permitted Equity Investment is 75% of the total asset allocation till the age of 50. Post that, the upper cap reduces by about 2.5% every year to 50% at the age of 60.

Auto – Under NPS Auto option, fund allocation takes place automatically. This option is best for those subscribers who do not have the required knowledge to manage their NPS investments. In this option, the investments are made in life-cycle funds and depending on the risk appetite of NPS Subscriber, there are three options available within ‘Auto Choice’:

  • Aggressive – LC75 – Aggressive Life Cycle Fund: This Life cycle fund provides a cap of 75% of the total assets for Equity investment. The exposure in Equity Investments starts with 75% till 35 years of age and gradually reduces and goes down to 15% by the age of 55 and beyond.
  • Moderate – LC50 – Moderate Life Cycle Fund: This Life cycle fund provides a cap of 50% of the total assets for Equity investment. The exposure in Equity Investments starts with 50% till 35 years of age and gradually reduces and goes down to 10% by the age of 55 and beyond.
  • Conservative – LC25 – Conservative Life Cycle Fund: This Life cycle fund provides a cap of 25% of the total assets for Equity investment. The exposure in Equity Investments starts with 25% till 35 years of age and gradually reduces and goes down to 5% by the age of 55 and beyond.

That was about the NPS portfolio allocation between various assets and schemes.

Now here is what the National Pension Scheme Calculator (or NPS calculator) calculates and shows as output once the inputs are provided:

  • The total amount invested (contributed) during the accumulation phase
  • The total corpus accumulated
  • Amount available as one-time tax-free withdrawal
  • Amount used for Annuity Purchase
  • Monthly Pension Amount during retirement years

Like any other investment product, NPS also benefits from compounding. So more the invested money, the more the accumulated amount and the larger would be the eventual benefit of the accumulated pension wealth. To find out the Best NPS Funds Managers (2019 2020) and to check returns generated by NPS schemes, please check out this link – NPS Scheme Fund Manager Returns.

Here again, is the link to download the calculator:

Download (Free) Excel National Pension Scheme Calculator

 

NPS is one of the few products that have been made specifically for retirement savings. Other good ones being PPF (Public Provident Fund Interest Rates and How to become a PPF Crorepati and Free PPF Calculator), EPF and doing regular long term SIP in Equity Funds. The investment in NPS also offers tax benefit under Section 80C (within Rs 1.5 lac per year) and extra benefit under Section 80CCD (1B) upto Rs 50,000 per year. This makes NPS as an attractive retirement solution for many people who are looking for NPS tier 1 and tier 2 tax benefits. As for NPS Tier 1 and Tier 2 which is better? Since Tier 1 has a lock-in practically till retirement, its better option for retirement planning. Tier 2 is best for non-retirement related savings – which can be for other financial goals as well.

But it must be noted that whether it should be the only retirement product that you invest in or not is debatable. There is a case for investing separately in equity funds for retirement as well.

Hopefully, this excel based NPS Pension calculator will help you understand the retirement savings product NPS better and also act as a decision-making tool to make informed investment decisions about how much to invest in NPS for retirement savings.