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Retirement planning with NPS

Henil Shah
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Retirement planning with NPS

National Pension System or NPS as it is popularly known is always looked at from a tax deduction perspective. If you invest in NPS, you are eligible for a deduction of up to Rs 50,000 under section 80CCD (1B) of the Income Tax Act. Moreover, this is an additional deduction over and above Rs 1.5 lakh deduction under section 80C. 

 

Investment in NPS is quite a long-term affair as the basic purpose of investing in it is for your retirement. The main objective of NPS is to provide you with regular pension periodically post-retirement. However, people just look at it from the tax deduction perspective. In this article, we would discuss how to use NPS to accumulate your retirement corpus. Also, we would look at the performance of different pension fund managers. 

 

When it comes to NPS, you have two kinds of accounts: 

- Tier I account: It is mandatory with restrictions on an early withdrawal. 

- Tier II account: It is voluntary with no restrictions on withdrawal. 

 

As we are looking at NPS as an investment avenue for retirement, we would be sticking with the Tier I account. Therefore, the return assumptions would certainly be pertaining to the tier I account. 

 

However, before moving ahead, let us assume a few things. While providing an illustration, we are assuming that your current age is 30 years, and your retirement age is 60 years. Further, we would also assume the inflation rate at 7 per cent in the pre as well as post-retirement phase. While deriving the monthly pension, we have assumed the rate of return to be 6 per cent. On the other hand, for the pre-retirement phase wherein, we would be accumulating the corpus by investing in a portfolio comprising of equity, corporate bond, and government securities (ECG). Therefore, we would first assume the returns of ECG and then would give weights to the individual asset class to come up with the ECG portfolio returns assumption. We would be taking 5-year rolling returns of Nifty 50 Total Returns Index (TRI), S&P BSE India Corporate Bond TRI, and CCIL All Sovereign Bonds TRI. 

 

 

The above graph shows the average 5-year rolling returns of Nifty 50 TRI, S&P BSE India Corporate Bond TRI, and CCIL All Sovereign Bonds TRI. Therefore, we would be assuming that on average, equity, corporate bonds, and government securities would return 12 per cent, 9.5 per cent and 9.6 per cent, respectively. Furthermore, our allocation would be 70 per cent, 20 per cent, and 10 per cent towards equity, corporate bond, and government securities, respectively. This brings us to assume ECG portfolio returns to be 11.26 per cent. 

Now, as we have all the assumptions in place, let’s calculate the required retirement corpus with current monthly expenses to be Rs 25,000. Assuming 100 years as life expectancy, you would need Rs 3.5 crore as retirement corpus. 

Let’s see how much you would need to invest every month in NPS to achieve the above-calculated corpus. Having said, you at least need to invest Rs 13,000 per month in NPS for the next 30 years to achieve your retirement corpus. Moreover, the early you start, the less you need to save on a monthly basis. 

 

Performance of pension fund managers

Name

Assets (Rs Cr)

Trailing Returns (per cent)

1-Year

3-Year

5-Year

TIER I: Equity Plans

Birla Sun Life Pension Scheme

118

64.64

12.16

-

HDFC Pension Fund

6,672

68.02

13.09

15.84

ICICI Prudential Pension Fund

2,910

70.21

12.20

14.55

Kotak Pension Fund

582

67.75

11.59

14.47

LIC Pension Fund

1,472

71.70

10.60

13.34

SBI Pension Fund

5,584

63.86

11.47

14.35

UTI Retirement Solutions

832

69.79

11.43

14.65

TIER I: Government Bond Plans

Birla Sun Life Pension Scheme

78

9.94

10.18

-

HDFC Pension Fund

4,853

10.63

10.51

9.84

ICICI Prudential Pension Fund

2,322

9.43

9.91

9.53

Kotak Pension Fund

463

9.82

10.03

9.63

LIC Pension Fund

1,357

9.86

11.04

10.77

SBI Pension Fund

5,761

9.96

10.08

9.71

UTI Retirement Solutions

752

10.17

9.81

9.22

TIER I: Corporate Debt Plans

Birla Sun Life Pension Scheme

51

11.08

9.75

-

HDFC Pension Fund

3,029

11.89

9.97

9.63

ICICI Prudential Pension Fund

1,513

11.93

9.52

9.42

Kotak Pension Fund

293

9.62

8.23

8.65

LIC Pension Fund

781

12.34

9.59

9.23

SBI Pension Fund

2,982

11.34

9.65

9.39

UTI Retirement Solutions

424

10.97

9.04

8.94

Source: Value Research

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