Retirement Planning from Tax Saving: How you can save Rs 61 lakh tax, create Rs 4 crore tax-free retirement corpus by 14% NPS tax benefits in 30 years

Retirement Planning from NPS Tax Saving: If you are a salaried-class individual, the new tax regime offers many tax benefits that can make your income tax-free even if it is significantly higher than the limit of Rs 12,75,000.

Among some such benefits is National Pension System (NPS) tax benefit, which you can get on the employer’s contribution of up to 14 per cent of your basic pay and dearness allowance (DA).

The tax benefit, if used wisely, may not only help you save tax of over Rs 60 lakh in 30 years, but it may also help you generate a tax-free retirement corpus of around Rs 4 crore. Know how it may be possible-

What is NPS?

NPS is a retirement scheme where an individual, including an employee of a government or the private sector, can contribute monthly to create a retirement corpus.

For the scheme, both the employee and the employer contribute to the employee’s NPS account. 

In the central government sector’s case, the employee contribution is 10 per cent of their basic pay and DA, and Centre’s is 14 per cent.

In the private sector, the employee’s contribution is 10 per cent of their basic pay and DA.

It is not compulsory for the employer to contribute, but if it wants, it can contribute up to 10 per cent of the employee’s basic pay and DA.

NPS corpus at retirement

The NPS contribution is invested in mutual funds and fixed interest schemes to create a retirement corpus for the employee.

They can withdraw this corpus of up to 60 per cent at 60 years of age.

From the remaining 40 per cent, they need to purchase an annuity plan, which provides a monthly pension.

The retirement corpus is tax-free. However, income drawn from the annuity plan will be taxed at slab rates.

NPS tax benefit in new tax regime

The new tax regime offers tax benefits on the employer’s contribution to an employee’s NPS account.

The maximum benefit in such a case can be 14 per cent of the employee’s basic pay and DA.

There is no tax benefit available on the employee’s NPS contribution to their account.

The tax benefit is available only to the employee’s NPS Tier I account.

There is no such benefit for Tier II NPS account holders. 

How NPS tax benefit can be used to create retirement corpus

We are creating two scenarios here.

In the first scenario, we will show what retirement corpus a 30-year-old can create by 60 years of age just from the NPS tax benefit. 

In the second scenario, we will also show what the estimated total corpus will be, including the employee’s contribution, and it can be built in that duration. 

We will take 12 per cent as the annualised return with 75 per cent investment in equity and 25 per cent in fixed interest rate assets.

Retirement corpus from NPS tax benefit (Scenario 1)

Employee age- 30 years
Retirement age- 60 years
Current Salary- Rs 13,00,000 per annum
Basic pay- Rs 6,50,000
Tax benefit- 14% of basic pay= Rs 91,000/year 
NPS investment amount in 1st year= Rs 91,000/12= Rs 7,584/month
Annual top up- 5%
Return expectation- 12 per cent
Return from annuity- 7 per cent
Total investment in 30 years- Rs 60,46,467 (This will also be the total tax benefit in 30 years)
Total tax-free corpus- Rs 3,99,93,511
Total estimated monthly pension- Rs 93,318

Retirement corpus from NPS contribution (Scenario 2)

Employee age- 30 years
Retirement age- 60 years
Current Salary- Rs 13,00,000 per annum
Basic pay- Rs 6,50,000
Employer’s NPS contribution (Tax benefit)- 14% of basic pay= Rs 91,000/year 
Employee contribution – 10% of basic pay= Rs 65,000/year 
Total NPS investment in 1st year= Rs 91,000+65,000/12= Rs 1,56,000/year= Rs 13,000/month
Annual top up- 5%
Return expectation- 12 per cent
Return from annuity- 7 per cent
Total investment in 30 years- Rs 1,03,64,460
Total tax-free corpus- Rs 6,85,54,277
Total estimated monthly pension- Rs 1,59,960