October 1 every year is celebrated as National Pension System (NPS) Diwas in India, promoting pension and retirement planning among citizens. NPS, a government-run investment scheme, offers a decent opportunity to secure financial future. In this guide, we will explore how you can potentially receive a monthly pension of Rs 50,000 through NPS.

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Understanding NPS

NPS provides subscribers with the flexibility to allocate their investments across different asset classes. There are two primary NPS accounts — Tier 1 and Tier 2. While Tier 1 is strictly a pension account, Tier 2 is a voluntary savings account associated with the Pension Regulatory Authority of India (PFRDA).

It allows subscribers to contribute at any time during the financial year and adjust their savings annually. Subscribers have the freedom to choose their preferred investment options and pension fund, allowing them to watch their investments grow. The NPS account remains accessible from anywhere, even if investors relocate or change jobs.

Investing in a Tier 1 NPS account offers income tax benefits. Subscribers can claim tax deductions of up to 10 percent of their gross income, subject to a limit of Rs 1.5 lakh, under Section 80C of the Income Tax Act. Additionally, an extra deduction of Rs 50,000 is available exclusively for NPS subscribers under Section 80CCD (1B).

The returns in NPS depend on the selection of the pension fund managers (PFMs), investment options, asset allocation, time horizon of investment and risk appetite, i.e. whether one is an aggressive or conservative investor and the period for which one shall remain invested under NPS.

How to achieve Rs 50,000 monthly pension?

Kurian Jose, CEO at Tata Pension Management, outlines a strategic approach to secure substantial retirement income through NPS. He suggests that one start by dividing the savings into short to medium-term goals and long-term retirement planning.

"NPS is an excellent choice for the latter. It leverages the power of compounding over the long term. As contributions grow and generate returns, this compounding effect significantly boosts the retirement corpus," he told CNBC-TV18.com.

Jose further explained this with an example as to how much pension an individual can get on retirement by using NPS.

"Consider a 30-year-old who invests Rs 5,000 per month in NPS with a recommended allocation of 50 percent in equities and 50 percent in government and corporate bonds. Assuming a 6 percent annual contribution increase and a 10 percent return on investment, the corpus grows to Rs 1,84,96,125. Opting for a 100 percent annuity provides a monthly pension of Rs 1,05,292 from age 60, which can be used for life. In case of the subscriber's unfortunate demise, the pension passes to the spouse during their lifetime, and the principal corpus can be claimed by the nominee," he said.

He calculated this using Tata Pension Management's NPS calculator. Similarly, there are several NPS calculators available online which can be used to see the result.

Another example, which Jose cited, is for a 40-year-old subscriber.

He said that a four-year old can get a similar result by starting with Rs 5,000 per month and increasing their annual contribution by 20 percent. This strategy results in a corpus of Rs 1,99,78,431 and a monthly pension of Rs 1,13,730, assuming a 6.5 percent annuity rate and 100 percent pension corpus to annuity.

However, this may be just one calculation and investors may consider all factors before investing in the avenue.

Best performing NPS Tier-I returns 2023 – scheme

(Source: Cleartax)