National Pension Scheme
The National Pension System (NPS), previously known as National Pension Scheme, is an investment instrument offered by the Central Government. The Pension Fund Regulatory and Development Authority (PFRDA) regulates the NPS, ensuring maximum security.
You may invest in NPS regularly during your working years and create substantial wealth for retirement. Once you retire, a portion of the accumulated maturity amount will become available for withdrawal. And you will receive the rest as a monthly pension.
Any Indian resident can invest in NPS. You can benefit from this pension scheme if you are a government, private or unorganized sector employee. But, before investing in NPS, you must learn how the scheme works. To understand this, use an NPS calculator online to get an idea about the returns the scheme can generate.
The benefits of NPS
NPS has become a popular investment avenue over the last few years due to its substantial returns and security. The scheme offers many other benefits that make it a suitable investment option for everyone. Here are five noteworthy advantages of NPS.
1. High returns
When investing to build a retirement fund, your focus should be to earn high returns. And NPS can offer that as it has historically provided 8% to 10% annual interest for more than a decade. When you invest in NPS, the fund managers put a portion of the money in equity-based investment options. That is how NPS generates higher returns than most other tax-saving schemes.
Additionally, if you are not satisfied with the returns, the scheme allows you to change the fund manager as well.
2. Stabilized risk
Equity-linked investment products are generally risky as market volatility can affect their returns. But NPS is a safe option as the scheme systematically stabilizes the risk. If you are a government employee, NPS allows you to invest only up to 50% of your total fund in equities. The limit is between 50% and 70% for non-government employees.
After you reach 50 years, the scheme’s equity exposure automatically starts to reduce by 2.5% every year. If you are 60 years or more, the equity exposure limit will become fixed at 50%. This systematic stabilization balances risk and returns, ensuring that your money is safe.
If all these seem too complicated, you can use a National Pension Scheme calculator. It will quickly give you a maturity amount estimation without any hassles.
3. Tax benefits
One benefit of NPS that makes it lucrative is the tax deductions it offers. The contributions you and your employer make towards NPS are tax-deductible up to ₹1.5 lakhs. The self-contributed amount is tax exemptible under subsection 80CCD (1) of Section 80C of the Income Tax Act, 1961. The deduction limit is 10% of your salary or ₹1.5 lakhs, whichever is lower. The tax benefit for the employer’s contribution is covered under Section 80CCD (2).
If you are self-employed, the tax deduction limit is 20% of your gross income under subsection 80CCD (1). But you will not get any exemption under Section 80CCD (2).
Under Section 80CCD (2), the tax deduction limit is whichever is the lowest from the following.
- Employer’s NPS contribution
- Total gross income
- 10% of basic pay and Dearness Allowance (DA)
Additionally, Section 80CCD (1B) allows a tax deduction of up to ₹50,000 on your contribution to the NPS account. So, you can get a total tax exemption of up to ₹2 lakhs using the benefits offered by Sections 80CCD (1) and 80CCD (1B).
4. Emergency withdrawal
You may withdraw up to 60% of your accumulated NPS fund after the age of 60 years. You will get the remaining amount as pension paid on a regular basis from an insurance firm registered under PFRDA. Moreover, the withdrawn amount is tax-exempted.
It is always advisable to stay invested in the NPS until you retire, allowing your money to grow into significant wealth. But NPS allows you to withdraw up to 25% of the fund for emergency purposes after staying invested for at least three years. The reasons for withdrawal can be medical treatment for yourself or your family, buying or building a house, higher education or wedding of children, and other purposes.
You can withdraw the money three times during the investment tenure with a minimum gap of five years between each withdrawal.
5. Equity allocation flexibility
The Scheme E of NPS lets you invest up to 50% of the money in equity-based options. You may decide between active and auto choices for equity investments. If you select the former, you will have the freedom to decide how much to invest in equities within the set limit.
The latter decides the equity contributions as per your age. The older you get, the lower will be the equity allocation, thereby reducing risk.
The formula for calculating the NPS amount
NPS offers compound interest like any other high-return investment product. You can use an NPS calculator to determine how much return you can expect from your investment within seconds. But, if you want to understand how the calculation works, it is important to learn the NPS formula, which uses multiple components:
- A: Maturity amount
- P: Principal amount invested
- r: Annual interest rate
- n: Number of times the interest is compounded
- t: Tenure of investment
Based on the above components, the formula is A = P x (1 + r/n) n.t
Let us understand the formula with the help of an example. Suppose you are presently 34 years old and decide to start contributing ₹3,000 a month to the NPS account. If you get an interest rate of 10% during the investment tenure of 26 years, the maturity amount will be ₹44.35 lakhs for a total contribution of ₹9.36 lakhs.
Using an NPS return calculator, you can determine the expected profit based on your age and monthly investment.
How to use the NPS calculator
The NPS calculator is quick and easy to use with the following five steps.
- Mention the amount you wish to contribute under the “How much do you want to invest per month?” section.
- Adjust the slider under “Your Current Age” to input your age.
- Adjust the slider under “What Is Your Expected Rate of Return?” to input the interest rate of NPS.
- Adjust the slider under “What Percent Do You Wish to Invest in Annuity?” to mention the percentage of the total contribution you want to be invested in annuity.
- Adjust the slider under “How Many Years Do You Wish to Invest?” to provide the investment tenure.
After you provide the details based on your requirements, the NPS pension calculator will show your total investment, lump-sum value, annuity value, and total maturity amount.
Where to invest: NPS vs. PPF
Public Provident Fund (PPF) and NPS both are popular investment options in India, especially among people who want to build a substantial retirement fund. The choice depends on your investment goals and risk appetite. Both PPF and NPS offer a variety of benefits but also have fundamental differences. Below table shows a comparative analysis of both the options to help you make an informed decision.
Rate of return
Historically provided 8% to 10% interest.
The current interest rate offered is 7.1%. The government decides it quarterly.
Minimum risk as the scheme controls it systematically. But NPS is linked to the market. So, it is not completely risk-free.
No risk as the investment is not linked to the market.
Section 80C of the Income Tax Act, 1961 offers a tax deduction of up to ₹1.5 lakhs on your contribution. Another ₹50,000 of tax deduction is available under Section 80CCD(1B).
You can get a tax deduction of up to ₹1.5 lakhs on your investment under Section 80C of the Income Tax Act, 1961.
As you can see from the above information, NPS has the potential to offer higher maturity benefits. So, if you are willing to take a little risk, NPS will help you build a more sizable retirement fund than PPF.
How does the NPS work?
NPS has two stages: accumulation and retirement.
- Accumulation: During this stage, NPS uses your contribution to accumulate funds by reinvesting the money in different options like debt instruments, equities, treasury bills, and government bonds. The growth continues until your retirement.
- Retirement: After retirement, you can withdraw up to 60% of the NPS fund. The remaining amount is used to invest in annuity plans that pay regular returns.
FAQs related to the NPS calculator
1. Who can use the NPS calculator?
Anyone eligible to invest in NPS can use the calculator. Presently, Indians between the age of 18 and 60 years can contribute to the scheme. If you belong to the group, the calculator will help you instantly get an idea about the potential returns.
2. What does the calculator show?
Once you input the investment amount, age, expected rate of return, and other required information, the calculator will reflect the following four things.
- Total investment
- Lump-sum value
- Annuity value
- Total maturity amount
There are eight fund managers currently offering NPS in India. Before investing, you may check the net promoter score calculation to determine which service providers are more reliable and offer good returns while lowering the risks.
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