Tax-saving retirement plan: 14% NPS tax benefits in the new tax regime can help you generate a tax-free retirement corpus of Rs 4,00,00
NPS tax-saving retirement plan: If you are a paid level person, the new tax system will offer many tax benefits, even if it is significantly above the Rs 12,75,000 limit, tax-free.
Among such benefits, the National Pension System (NPS) tax benefits allow you to get 14% of your employer’s basic salary and dependency allowance (DA).
If you use the tax benefits wisely, it will not only help you save over Rs 6 lakh in taxes over 30 years, but it will also help you generate a tax-free retirement corpus of around Rs 4 lakh. Knowing this might be possible –
What is NP?
NPS is a retirement plan in which an individual, including employees in the government or private sector, can contribute monthly to create a retirement corpus.
For the program, both employees and employers contribute to the employee’s NPS account.
In the case of central government departments, employees contributed 10% of their base salary and DA and 14% of the center.
In the private sector, employees’ contributions are 10% of their basic salary and DA.
Employers are reluctant to contribute, but if needed, it can contribute up to 10% of the employee’s basic salary and DA.
NPS Corpus at Retirement
NPS donations invest in mutual funds and fixed interest programs to create a retirement corpus for employees.
They can withdraw up to 60% of the corpus by the age of 60.
Starting with the remaining 40%, they need to purchase an annuity plan, which provides monthly pensions.
The retirement corpus is tax-free. However, income obtained from annuity plan will be taxed at a flat rate.
NPS tax benefits for the new tax system
The new tax system provides tax benefits for employers to contribute to employees’ NPS accounts.
In this case, the maximum benefit can be 14% of the employee’s base salary and DA.
Employees have no tax benefits available for NPS donations to their accounts.
Tax benefits are only available to employees’ NPS Level I accounts.
There is no such benefit for Level II NPS account holders.
How NPS tax benefits are used to create a retirement corpus
We create two schemes here.
In the first case, we will show the retirement corpus that 30-year-olds can create from NPS tax benefits at the age of 60.
In the second case, we will also show the meaning of the estimated overall corpus, including the contribution of the employee, and can be established over that duration.
We will receive 12% annual return, 75% equity investment, and 25% fixed-rate asset investment.
NPS tax incentives for retirement corpus (Scheme 1)
Employee age 30
Retirement age 60
Current salary is 13,00,000 per year
Basic payment of Rs 6,50,000
Tax Benefits – 14% of base salary = Rs 91,000 per year
NPS investment amount for the first year = Rs 91,000/12 = Rs 7,584/month
Highest increase in the year -5%
Return to expectations – 12%
Return 7% from annuity
Total investment in 30 years – Rs 60,46,467 (this will also be the total tax incentive in 30 years)
Total tax-free corpus 3,99,93,511
Total estimated monthly pension – Rs 93,318
NPS Contribution Retirement Corpus (Program 2)
Employee age 30
Retirement age 60
Current salary is 13,00,000 per year
Basic payment of Rs 6,50,000
Employer's NPS contribution (tax offer) – 14% base salary = Rs 91,000/year
Employee contribution – 10% base salary = Rs 65,000/year
Total investment in NPS investment in the first year = Rs 91,000+65,000/12 = Rs 1,56,000/year = Rs 13,000/month
Highest increase in the year -5%
Return to expectations – 12%
Return 7% from annuity
Total investment over 30 years -1,03,64,460
Total tax-free corpus 6,85,54,277
Total estimated monthly pension – Rs 1,59,960
