Long Term Growth of Rs.10,000 in NPS Scheme

Under the Union budget this year, tax deductions are applicable to an additional amount of INR 50,000, invested in the new pension plan, under section 80 CC(D). With the additional tax benefit, this scheme that was introduced in 2009 is expected to be more attractive to private investors.

There are no other benefits or modifications to the features from the annual budget. Nonetheless, the additional tax benefit is expected to bring in huge investments in the next few years.

To determine if the inclusion of the national pension system (NPS) makes sense for retirement planning, it is important to understand the benefits.

· An additional amount of INR 50,000 to lower tax deductions makes it one the best tax saving schemes

· An alternative to employer provident fund (EPF)

· Affordable pension plan with fund management fee ranging between 0.05% to 0.25% per year

· Portable within any part of the country

· Flexibility to choose fund manager

· Flexibility to invest in various asset classes

· An EET (exempt, exempt, taxable) scheme; contributions and annuities on maturity are not taxed, but lump sum withdrawals are taxable

To understand how to apply for NPS, you can check the various online resources available.

Equity Exposure

One major difference between the NPS and EPF is the flexibility of including equity available under the national pension system. Such exposure is capped to 50% of the amount to protect your money from market risks. Considering the longer period, even 50% equity contributions can significantly increase the returns on your investments. One major benefit of this tax saving scheme is that it is not liquid, which means that investors remain invested for longer durations for better returns.

Objective of the Scheme

Using a national pension system calculator, individuals can assess the amount that they would require in order to maintain their standard of living after retirement. The objective of this scheme is to provide regular income to retirees. This purpose will be defeated if the corpus is not invested for long periods in equities. Early withdrawals under this scheme are discouraged as adequate times should be given to the corpus sufficient to maximize the compounding benefits.

Long-Term Growth of INR 10,000 Invested in NPS

If a 30-year old individual invests INR 4,000 per month for the next 3 decades in NPS, total investment is INR 14.40 lacs. The accumulated corpus in NPS at a rate of 8% per year is roughly INR 60 lacs, which amounts to an interest earning of INR 45.61 lacs. Even if the investor withdraws 60% as a lump sum on maturity and converts 40% to annuities, s/he will be able to enjoy decent returns making NPS a beneficial option. The pension in this case amounts to a little more than INR 10,000 per month.

The lump sum amount that can be withdrawn at the time of maturity is limited to 60% of the accumulated corpus. To know about this amount, you can check the national pension system calculator which also provides additional information on how to apply for NPS schemes.