How to generate a monthly pension of Rs.1 lakh from NPS?

The Pension Fund Regulatory and Development Authority (PFRDA), which is governed by the Ministry of Finance of the Government of India, oversees the National Pension System (NPS), a voluntary specified contribution pension scheme in India. Four asset classes—equity, corporate debt, government bonds, and alternative investment funds—as well as a number of Pension Fund Managers (PFMs) are available through NPS. 

Due to these advantages, NPS is a trusted provider of pension income and is most suitable for subscribers who seek to regularly earn income from their retirement investments. NPS subscribers may invest up to 75% of their funds in equity (E) under active choice and may choose from any of the annuity plans offered by Annuity Service Providers (ASPs) registered with IRDAI and appointed by PFRDA, allowing them to receive pension until the time of any unfortunate event. 

Based on the subscriber's age, contribution amount, age limit to make contributions, expected return, and annuity slab, the returns from NPS differ. So let's know how an NPS subscriber can generate a monthly pension of Rs.1 lakh from our different industry experts.

Gautam Kalia, SVP and Head Super Investor at Sharekhan by BNP Paribas

NPS is an alternative low-cost investment option to create a retirement corpus. It also provides an additional deduction of Rs.50,000 for tax savings under section 80CCD which is over and above the existing tax deduction of Rs1.5Lakh under section 80C.

To get a monthly income of Rs.1Lakh after retirement from NPS investment, there are certain assumptions that need to be made to arrive at the monthly contribution required.

Say, the investor starts regular monthly investments at age 35 to invest in NPS and it grows at 10% per annum. At retirement at 60 years, the investor takes an annuity investment using 80% of the corpus that yields 6% p.a. With these assumptions, the monthly contribution required is ₹17,000/- per month. If the investor takes the annuity investment using 40% of the corpus only, then the monthly contribution required is ₹34,000 per month. In both these scenarios, the monthly income received by the client shall be ₹1 lakh.

Shyamsundar Baliga, Chief Executive Officer at Kotak Pension Fund

An essential step in retirement planning is allocating our savings appropriately towards liquidity needs (say six months’ expenses), medium-term requirements (say 3-5 year goals), and long-term goals (retirement). The key to generating a sizeable pension for retirement is to systematically invest the retirement portion of savings in an instrument that is well-regulated, is cost-efficient and tax-efficient, as well as generates substantial returns. Hence the selection of the retirement saving product is crucial.

National Pension System (NPS) fits the bill perfectly. It is the most cost-effective actively-managed retirement solution globally. Low cost means that investment allocation is maximised; it makes a difference to the returns and hence the final corpus. 

NPS has delivered superior returns compared to alternatives and inflation, with equity schemes generating approximately 12.5% p.a. since inception and debt schemes between 9% and 9.5% p.a. From tax-efficiency point of view, NPS enjoys ‘E-E-E’ treatment for taxation – exclusive tax benefits for investment, tax-free accruals, and tax-free withdrawals (subject to conditions).

Suppose a 30-year-old starts retirement savings in NPS with a 50-50 allocation between equities and government securities (equities will drive growth of the corpus and g-sec will provide relative stability). Based on returns of NPS so far, calculations show that she can earn a post-tax pension of Rs.1 lakh p.m. from the age of 60 years, by starting with a monthly investment of around Rs.5,500 and nominally increasing the SIP by 5% every year till the age of 60 years. 

A 40-year-old can achieve the same results by starting with investment of say around Rs.19,000 p.m. While these are illustrative figures, the key is to invest systematically and lock in the corpus till the age of 60 years. The resultant corpus can be used to purchase a lifetime annuity for self and spouse, from a life insurance company.”

Methodology / assumptions –

- Equity returns of 12.5% p.a. and g-sec returns of 8% p.a. gives combined returns of 10.25% p.a. with 50-50 allocation

- Monthly SIP up to the age of 60, with 5% increase in SIP amount each year

- Lifetime annuity rate of 8% without return of purchase price, with 100% annuity to spouse upon death of annuitant

- Tax rate of 34% on annuity income

- NPS is a market-linked non-guaranteed product; the figures are illustrative only, based on historical actual returns of a long period

Ruchika Bhagat, MD Neeraj Bhagat & Company

Start investing early: The earlier you start investing in NPS, the better it is for generating a higher corpus. NPS is a long-term investment option, and the longer you stay invested, the better returns you can expect.

Choose the right investment option: NPS offers two types of investment options – active and auto. In the active option, you have the flexibility to choose the asset allocation for your investment, while in the auto option, the asset allocation is done automatically based on your age. You should choose the option that suits your investment style and risk appetite.

Invest regularly: It is important to invest regularly in NPS to accumulate a significant corpus. You can choose to invest either monthly, quarterly, or annually, as per your convenience.

Opt for higher contribution: You should opt for higher contributions towards NPS, which can be done through voluntary contributions. This will help in generating a higher corpus, which can be used for generating a higher pension.

Choose the right annuity plan: Once you retire, you need to use at least 40% of the accumulated corpus to purchase an annuity plan, which will provide you with a regular income stream. You should choose the annuity plan that offers a monthly pension of ₹1 lakh or more, based on the corpus accumulated.

Use the NPS calculator: You can use the NPS calculator available on the official website to determine the amount of contribution required to generate a monthly pension of ₹1 lakh based on your age, investment horizon, and investment amount.

Monitor your investment: You should monitor your NPS investment regularly to ensure that you are on track to achieve your retirement goals. You can also make changes to your investment strategy, if required, based on your changing circumstances.

We can also give an example: As an investor, you can start with the monthly contribution of INR 15000 per month with equity debt exposure to 60:40 and buying annuity of at least 60 of the net NPS maturity amount. This can give you a monthly pension of 1 Lakh.

Yashoraj Tyagi, CTO & CBO, CASHe

To generate a monthly pension of ₹1 lakh from the National Pension System (NPS), you need to follow these steps:

Open an NPS account: The first step is to open an NPS account by registering online or visiting a Point of Presence (PoP) authorized by the Pension Fund Regulatory and Development Authority (PFRDA).

Choose the right investment option: The NPS offers two types of investment options – Active choice and Auto choice. Under the Active choice option, you can choose the asset allocation among equity, corporate bonds, and government securities. Under the Auto choice option, the asset allocation is based on your age.

Invest regularly: You need to invest regularly in the NPS to accumulate a significant corpus. You can choose a monthly, quarterly, or annual contribution option. The minimum annual contribution is Rs. 1,000.

Opt for the Annuity option: At the time of retirement, you need to use a minimum of 40% of the accumulated corpus to purchase an annuity from an authorized life insurance company. The annuity provider will then pay you a fixed monthly pension based on the annuity plan chosen.

Assuming a life expectancy of 20 years after retirement and an average return of 8%, you need to accumulate a corpus of approximately Rs. 2.4 crore to generate a monthly pension of Rs. 1 lakh from the NPS. However, the actual amount may vary based on your age, the investment option chosen, and other market conditions.

It is advisable to consult with a financial advisor to determine the required contribution amount and investment strategy to achieve your desired monthly pension from the NPS.

Deepak Bhuvneshwari Uniyal, Co-founder and CEO, Insurance Samadhan

Generating a monthly pension of ₹1 lakh from the National Pension System (NPS) requires a carefully crafted investment strategy and disciplined savings habit. Start by determining your retirement corpus, factoring in your expenses and inflation. Then, invest a significant portion of your savings in NPS, leveraging the power of compounding and tax benefits. 

Opt for the auto choice or active choice investment option, depending on your risk appetite and investment goals. Ensure that you diversify your portfolio across asset classes, including equity, corporate bonds, and government securities, to manage risk and optimize returns. 

Keep a close eye on your investment performance, review and rebalance your portfolio periodically to stay on track. With a long-term investment horizon, disciplined savings, and a well-designed investment strategy, you can generate a steady monthly pension of ₹1 lakh from NPS, ensuring a comfortable and financially secure retirement.

S Ravi, Former Chairman of Bombay Stock Exchange (BSE)

To generate a monthly pension of ₹1 lakh from NPS, you will need to make substantial contributions to the scheme throughout your working life. NPS or National Pension System is a government-backed retirement savings scheme that allows individuals to invest in a combination of equities, bonds, and government securities to build a retirement corpus some of the ways are;

1. Early Start: The earlier you start investing in NPS, the better. The longer the investment horizon, the more time your investments will have to grow.

2. Choose the right investment mix: Your investment mix should be based on your risk appetite, age, and retirement goals. A balanced mix of equities and debt is ideal for long-term investors.

3. Regularly Invest: To achieve your retirement goals, you need to invest regularly in NPS. You can set up an auto-debit facility to ensure that your contributions are made on time.

4. Maximise tax benefits: NPS offers tax benefits under Section 80C of the Income Tax Act. You can claim a deduction of up to ₹1.5 lakh on your contributions to NPS.

5. Stay invested till retirement: At the time of retirement, you can withdraw up to 60% of your corpus as a lump sum, and the remaining 40% must be used to purchase an annuity that will provide you with a regular income.

Mushraff Hussain, COO of Ezeepay

Generating a monthly pension of ₹1 lakh from NPS requires careful planning and strategic investments. Firstly, one needs to start early and choose the right investment option based on one's risk appetite and investment objective. Regular contributions to NPS are crucial, and I encourage it to build a significant corpus. 

To maximize your savings, you can avail of tax benefits under Section 80C, 80CCD (1B), and 80CCD. Secondly, at the time of your retirement, choose the most appropriate annuity plan that provides you with a regular income in the form of a pension. Supposedly, with an annual rate of return of 8% and an annuity rate of 6%, investing approximately ₹40,000 per month for 30 years can help you accumulate a corpus that generates a monthly pension of ₹1 lakh. Planning early, contributing regularly, and making informed investment decisions are essential to ensure a comfortable and financially secure retirement.

Malhar Majumder, Partner – Positive Vibes

The magic mantra is to start early! The amount to be earned is dependent upon the duration or the length of investment and the returns by the NPS. For someone who has started investing in the NPS at the age of 25 years with a monthly contribution of INR. 5,000/- or INR 60,000/- per annum; the total contribution will be INR. 21 lakhs by the time of his retirement. 

With an expected return of 10% annually, the total investment will grow into INR. 1.87 crore. Now, if you convert 65% of the corpus into an annuity, the value will be INR. 1.22 crore. Assuming that the annuity rate is 10%, the monthly pension works out to be INR. 1.0 lakh. The same is not true if you start later than the age of 25 years or the returns from the NPS and the annuity is less than 10% annually.

Nirav Karkera, Head of Research, Fisdom

Depending on your income level and risk appetite, you can attempt to achieve the target of INR 1 Lakh from investments into NPS. The more important thing to understand is that this investment will be for the very long term and so one must seek to maximise the key variables. This implies maximising the investment horizon, the investment amount, allocation to equity and conversion to annuity. 

While there is flexibility on deciding all parameters, one must try and maximise it to the extent possible and feasible. It is important to start early to maximise the horizon, invest the highest amount possible so as to achieve the target corpus required for an INR 1 lakh per month annuity. Increasing the allocation towards annuity product will also help bump the monthly income.

Kuldeep Parashar, CEO & Co-Founder at PensionBox

When it comes to building a retirement corpus, there is no one-size-fits-all solution. Whether it's NSC, ELSS, or bank FDs, each investment tool has its own advantages and disadvantages. We believe, to maximise your returns and minimise financial insecurity during your golden years, it's crucial to diversify your portfolio with a balanced mix of these helpful investment tools

Creating a bucket of such tools and investing small portions of your savings can help you balance out each tool. It's important to remember to ensure investments in secure, liquid, and easily accessible options so that you can withdraw your money whenever you need it.

Hence, with a user base of 1 lakh, we appreciate the concept that there is no perfect product that can guarantee you a perfect retirement. However, by diversifying your portfolio, you can ensure that you have a balanced mix of investments which will help you achieve your financial goals.

Akshar Shah , Founder, Fixed

The first step before you set your monthly pension target is to think about your expected expenses based on today’s value and then understanding what the time value of money will be of that expense during your retirement age.

Generating a monthly pension of 1 lakh in NPS requires a substantial corpus allocation at the beginning your retirement.

If we assume a 8% distribution per year then one needs to build a corpus of 2.5crore ₹in NPS (While this is an approximation and there could be many other factors)

You approximately need to set aside 20,000 monthly or 2.4 lakhs annually and invest the same for 25 years to reach corpus of RA 2.5cr assuming 10% return

To build a large corpus in NPS, it is important that you invest early and regularly. Investing early ensures that even with less contributions you can build a larger corpus at the retirement stage.

The next thing to understand is choices of investment options in NPS. Investors get options of either Auto or Active choice. While Auto decides asset allocation according to your age and risk appetite, active gives you the ability to choose between equity, debt and alternates if you are sure.