7th Pay Commission: How to contribute Rs 3,420 to NPS and retire with Rs 1 crore

New Delhi, Dec 15: There was some good news on the 7th Pay Commission, amidst the lull among Central Government employees, who have been desperately waiting for a pay hike.

There was a decision by the Union Cabinet last week on the Centre's contribution to the National Pension Scheme and if CG employees invest wisely, then they could retire very rich. We will explain to you how this works.

How to contribute to NPS:

If your basic salary is Rs 18,000 in the level 1 pay scale of the 7th Pay Commission and if you go on to contribute 10 per cent of your salary, which would be Rs 1,800 with the Dearness Allowance of Rs 1,620, then your total contribution would be Rs 3,420 in the tier 1 account of NPS. If you start investing at the age of 25 or earlier and start paying Rs 3,420 per month for the next 35 years, then your contribution becomes Rs 14.36 lakh. The interest rate of NPS is projected at 9 per cent. This means the interest earned on your contribution is around Rs 85.31 lakh and the overall pension becomes Rs 1 crore.

Withdrawals:

If 40 per cent of the pension comes at Rs 39.86 lakh and gets invested in annuity, then the remaining Rs 59.80 lakh can be withdrawn. The amount invested in annuity gives around Rs 26,000 per month after the retirement age of 60. The remaining amount withdrawn will be exempted from tax at the rate of 40 per cent.

What was the decision:

As per the decision, the Centre's contribution to the National Pension Scheme would now be 14 per cent instead of the earlier 10 per cent. This will benefit 18 lakh Central Government employees. Moreover 60 per cent of the withdrawal would be exempted from tax. The government contribution has risen from 10 to 14 per cent for those employees covered under the NPS Tier-I. Individuals will now have the freedom of choice for selection of Pension Funds an pattern of investment. The rules state that 40 per cent of the total accumulated corps used to buy annuity at retirement or reaching the age of 60 was already tax-exempted. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% was tax-exempt too.

What is NPS:

NPS is a government sponsored scheme which was launched in January 2004 for government employees. In the year 2009, it was however opened up to all sections. The 7th Pay Commission recommended for the setting up of a committee of secretaries. The committee was constituted and it submitted its report in 2018. It was on the basis of the draft the Cabinet approved the decision.