NPS Calculator: The National Pension System (NPS) is a market-linked retirement-oriented investment instrument. In NPS scheme, the investor is given choice to open two accounts — equity mode and debt mode — in single NPS account. According to the tax and investment experts, even if someone has high risk appetite, he or she should have fund allocation in NPS as diversification of the portfolio is necessary. They said that an NPS account allows equity exposure up to 75 per cent and one can choose that while opening the NPS account. They were of the opinion that 75 per cent equity exposure will help NPS scheme beneficiary to get around 11 per cent NPS interest rate in the long-term.
Speaking on the equity exposure available for the NPS investors Manikaran Singhal, Founder at goodmoneying.com said, “If someone has high risk appetite, then he or she can choose the highest 75 per cent equity exposure of the pension scheme. By doing that, one would be able to get 25 per cent debt exposure, which is the least debt exposure one can opt while opening the NPS account.” Singhal said that in NPS scheme, the investor has income tax exemption on investment up to ₹1.5 lakh in a particular financial year under Section 80C while an additional ₹50,000 under Section 80CCD (1B) of the Income Tax Act.
Highlighting upon the income tax rule in NPS investment Amit Gupta, MD at SAG Infotech said, ” ₹1.5 lakh income exemption under Section 80C includes all investments falling under the list of Section 80C like EPF or PF, PPF, ELSS Mutual Fund, etc.” However, the Chartered Accountant (CA) professional went on to add that ₹50,000 additional income tax relaxation given under Section 80CCD (1B) is beyond Section 80C benefit. So, if an investor has exhausted ₹1.5 lakh investment limit under Section 80C, he or she can invest in NPS to get an additional income tax benefit on ₹50,000 income. Gupta went on to add that Goods and Services Tax (GST) of 1.8 per cent is levied on the annuity buying but in case of NPS scheme, there is no GST levied on annuity buying. He said that one can expect 6-7 per cent annual return on annuity.
Suggesting investors to invest for higher returns instead of saving income tax outgo Kartik Jhaveri, Direcxtor — Wealth Management at Transcend Consultants said, “It’s better to get higher returns and pay income tax than to get lesser returns and avoid paying any income tax. One shouldn’t invest in NPS only because one’s Section 80C limit has been exhausted. One must note that if an investor has higher risk appetite, then it’s better to choose NPS ahead of Public Provident Fund (PPF), post office savings account or any other small saving scheme.”
On how 75:25 equity-debt ratio will reflect in NPS return Jhaveri said that one can expect at least 12 per cent return in equity in long-term time period while in debt instrument, an average 8 per cent return can be expected. Since the ratio is 75:25, 12 per cent equity will translate into 9 per cent (12 x 0.75) while 8 per cent debt return will translate into 2 per cent (8 x 0.25). So, the NPS investor can expect around 11 per cent return on one’s money if the equity debt exposure is 75:25.
So, assuming 11 per cent NPS interest, if an earning individual starts investing in NPS account at the age of 30, he or she would be investing in NPS for next 30 years. In that case the NPS calculator suggests that if the investor has chosen 60 per cent withdrawal at the time of maturity, the NPS withdrawal amount will be ₹1,01,88,821 or ₹1.01 crore while one will get monthly pension of ₹33,963.
The NPS calculator makes it clear that monthly pension of ₹33,963 comes from the ₹67,92,547 that will be used for annuity buying.
However, in case the NPS investor has low risk appetite, in that case he or she can expect to get around 8 per cent NPS interest and in that case the NPS calculator suggests that the net NPS withdrawal amount will be ₹54,01,063 while the monthly pension will be ₹18,004.
The NPS calculator further says that ₹36,00,709 will be the maturity amount used for annuity buying.