The NPS or Nationalized Pension Scheme is a Government of India’s pension scheme which offers a substantial return on investment and a monthly pension after retirement. It is a market-linked scheme, and hence has risks associated with it. This is regulated and administered by a government body, the PFRDA (Pension Fund Regulatory and Development Authority), which was set up under the PFRPDA Act of 2013. The act has defined NPS as a voluntary contribution fund that is linked to the market and managed by professional fund managers.
How to use NPS calculator
Upon successful creation of an NPS account, you are issued a Permanent Retirement Account Number or PRAN, which is unique to every individual, and hence an NPS account cannot be held jointly. Also, note that NPS can be held with only one bank or trustee.
There are many advantages to this particular investment option, and you may calculate your premium by using an NPS calculator. First and foremost, as it is market-linked, the corpus on retirement is bound to be a sizeable one. You can make partial withdrawals of up to 25% of the Tier I amount generated before retirement.
Read on: FD Maturity Amount Calculator: How To Calculate Maturity Value of Fixed Deposit?
There are two tiers of investing in an NPS. Tier I is the basic pension fund account where withdrawals are subject to restrictions. Tier II is a voluntary account, which can be held only when you have the Tier I account. This latter account provides liquidity in the form of investments and withdrawals, almost like a Mutual Fund. You also have the flexibility to opt for auto management of funds by fund managers or manually decide on which asset classes to invest in. Switch options are also available with limitations.
NPS attracts investors in a big way as contributions toward it are exempt from income tax with specified limits, under the Sections 80C, 80CCD(1) up to Rs. 1,50,000 and an additional Rs. 50,000 under Section 80 CCD (1B), in a fiscal year. Also, 40% of the total sum generated at maturity is tax-free.
Now that you have an overview of what NPS is and its features, you might be wondering how to calculate the regular premium that you should pay to get a sizeable corpus and monthly pension when you retire. You may do this easily by using an NPS calculator which is available on many websites. For example, Scripbox’s NPS Calculator helps you easily estimate your pension amount.
Here are the steps that you should follow when using any NPS Calculator:
- Depending on whether you would like to invest monthly or yearly, select the ‘Investment Type’. The quarterly option is not available
- Next, enter the investment amount you’d like to pay each month or yearly
- Input your current age, that helps in estimating the investment tenure
- The calculator shows results based on a default asset allocation of 50% in Equity, 30% in Corporate Bonds, and the rest 20% in government bonds. Based on all this, the calculator allows you to choose an expected return on investment, based on which your corpus value will change
- You are then required to enter the ‘Withdrawal % on Retirement’, which is the part of the pension amount you would want to receive as a lump sum when the premium paying term ends. This can be a maximum of 60%, and the rest amount is invested in an annuity plan, which you will be able to receive as a monthly payout
- You may also give the expected return of the annuity plan, which decides your monthly payout after retirement
- Taking into account all of these factors, the NPS calculator will provide an estimated amount of the total wealth gain, monthly pension, the corpus generated and the lump sum you will receive at retirement.
Consider an example where Mr. Sharma is 30 years old, and he decides to invest in NPS. He uses Scripbox’s NPS Calculator to help him find out the required values.
He wants to retire at 60 years of age, so the investment period becomes 30 years. He chooses the monthly payment as Rs. 5000 and the expected return on the investment to be around 9%. He chooses to withdraw 50% as a lump sum on retirement, and the rest will be continued in the annuity plan. 5% is his expected rate of return on the annuity, and he feels that he should be able to carry on till 85 years of age.
So in total, the Principal amount invested at Rs. 5000 monthly becomes Rs. 18,00,000 in 30 years and the interest earned on Investment becomes Rs. 74,22,370.
Aggregated Pension wealth hence becomes Rs. 92,22,370.
50% of this, he chooses to reinvest in the annuity, i.e. Rs. 46,11,185 and the other half he receives as a lump sum.
So his pension per month post-retirement will be around Rs. 26,957.
All of the quoted interest rates are assumptive and not reflective of the future market scenario.
