Income Tax Saving Calculations for FY2526: Using NPS tax benefits, how you can save Rs 61 lakh in tax, create Rs 4 crore fund, get Rs 93,000/month pension by 60
Save Tax While Building Wealth: National Pension System (NPS) provides the opportunity to save tax in the new tax regime, but do you know the same tax saving can help you amass a retirement corpus of nearly Rs 4 crore. At the same time, you can also get an estimated monthly pension of Rs 93,000. Know how it may be possible!
Save Tax While Building Wealth: The new tax regime for the financial year 2025-26 has increased the tax-free income limit for salaried-class individuals to Rs 12,75,000. But for taxpayers who are in the higher income group, there are many tax saving deductions available. National Pension System (NPS) is one of them. The new tax regime allows salaried-class individuals to claim deductions against employer contributions to their NPS account of up to 14 per cent of their basic pay. The same amount saved in tax through the NPS can help you create a retirement corpus of nearly Rs 4 crore. Even if you withdraw a 60 per cent corpus from the same amount, the estimated monthly pension that you can get from this amount will be over Rs 93,000. Know how it is possible-
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
How does NPS work?
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.
In central government jobs, the employee contribution is 10 per cent of their basic pay and DA, and Centre's is 14 per cent.
In private sector jobs, the employee's contribution is 10 per cent of their basic pay and DA.
How does NPS work?
It is not mandatory 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.
For the scheme, both the employee and the employer contribute to the employee's NPS account.
NPS tax benefit in new tax regime
Finance minister Nirmala Sitharaman during her Budget 2025 speech made an announcement that employees will get a tax benefit on the employer contribution to their NPS Tier I account. The maximum tax benefit allowed is 14 per cent of the employee's basic pay and DA. The benefit is available to private and government sector employees both.
NPS tax benefit limit increased from 10% to 14%
Earlier, the limit for the NPS tax benefit on the employer contribution was 10 per cent, which has now risen to 14 per cent of their basic pay and DA.
How will it work?
Suppose an employee has a salary package of Rs 15,00,000, where Rs 7,50,000 is their basic salary; the maximum NPS tax benefit on the employer contribution they can get is Rs 1,05,000.
Who can get NPS tax benefit?
Anyone who opts for NPS can get the tax benefit under this scheme, but it is more relevant to those who are falling in the tax bracket, i.e., employees who have over Rs 12,75,000/year salary income.
How one can build retirement corpus from NPS tax benefit
Suppose one has a salary package of Rs 13,00,000 and a basic salary of Rs 6,50,000; they get a maximum NPS tax benefit of 14 per cent, Rs 91,000 in a financial year. If they continue for a long time, they can build a sizeable NPS corpus.
Calculations for story
In the story, we will calculate how an employee with a Rs 13,00,000 gross salary and Rs 6,50,000 basic pay can create an NPS corpus through a 14 per cent employer contribution. Here, we expect a 5 per cent increase in their NPS contribution every month. Here are all the conditions:
Employee age- 30
Retirement age- 60 years
NPS contribution years- 30
Gross salary- Rs 13,00,000
Basic salary- Rs 6,50,000
NPS tax benefit for 1st year- Rs 91,000, Rs 7,583.33
NPS contribution spike- 5% every year
Expected return from NPS contribution – 12 per cent (on active scheme where 75 per cent investment is in equity and 25 per cent in debt).
Lump sum withdrawal at 60 years of age- 60 per cent
Annuity purchase- 40 per cent
Expected annuity return- 7 per cent
NPS contribution in 30 years
The total NPS contribution in the new tax regime in 30 years will be Rs 60,45,932. This is also the tax benefit that the employee will get in those years.
NPS retirement corpus in 30 years
At a 12 per cent annualised return, the corpus built from the same contribution can create an estimated corpus of Rs 3,99,89,978.
Lump sum withdrawal from NPS corpus
The estimated lump sum withdrawal at 60 years of age will be Rs 2,39,93,987.
Annuity purchase from NPS corpus
The estimated annuity after withdrawing the amount will be Rs 1,59,95,991.
Monthly pension from annuity purchase
The estimated monthly pension from the annuity purchase will be Rs 93,310.