As we approach our retirement age, it’s essential to have a financial plan in place to secure our future. One of the most popular retirement savings options available in India is the National Pension Scheme (NPS). It is a voluntary, defined contribution retirement savings scheme launched by the Government of India. In this article, we will discuss the benefits of investing in NPS and how to maximize your retirement savings with the National Pension Scheme calculator.
Table of Contents
- What is NPS?
- Benefits of investing in NPS
- Types of NPS Accounts
- Contribution to NPS
- NPS returns and interest rates
- NPS investment options
- National Pension Scheme (NPS) Benefits
- National Pension Scheme Calculator - What is it and how does it work?
- NPS vs other retirement savings options
- NPS services and providers
- Conclusion
- Frequently Asked Questions (FAQs) about NPS
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| NPS National Pension Scheme details, tax benefits, calculator |
Benefits of investing in NPS
The National Pension Scheme offers several benefits to investors. Firstly, it is a low-cost investment option, with minimal fund management charges. Secondly, it offers a range of investment options, including equity, corporate bonds, and government securities. Thirdly, it provides tax benefits under sections 80C and 80CCD of the Income Tax Act. Finally, it offers a steady source of income during retirement through annuity payments.
Types of NPS Accounts
The National Pension System allows individuals to make systematic investments via either of the following two accounts. unique Permanent Retirement Account Number or PRAN issued to each subscriber.
- Tier-1 account
- Tier-2 account
Contribution to NPS
Contributions to the National Pension Scheme can be made by individuals, corporates, and the government. The minimum contribution for a Tier 1 account is Rs. 500 per month or Rs. 6,000 per annum. The minimum contribution for a Tier 2 account is Rs. 250 per month or Rs. 3,000 per annum. The maximum contribution for both accounts is not fixed, and it depends on the investor's financial goals and risk appetite.
What is the difference between tier 1 and tier 2 accounts?
In tier 1 accounts withdrawal from funds are subject to specific restrictions. While in tier 2 accounts are voluntary accounts providing liquidity of funds via investments and withdrawals. individuals can subscribe to the National Pensions Scheme with PFRDA-appointed intermediaries via the two accounts tier 1 and tier 2.
| Tier-1 | Tier-2 | |
|---|---|---|
| Eligibility | Any Indian citizen between 18 & 65 years of age | Only Tier 1 account holders open |
| Lock in period age | 60 years | No lock-in period |
| annual contributions to the account | 1 time in a year | Not Mandatory |
| Minimum contribution | 500 | 250 |
| Income tax benefits | under Section 80C up to Rs 1.5 lakh + under Section 80CCD (1B) up to Rs 50,000 | No Tax benefits |
NPS returns and interest rates
The National Pension Scheme offers market-linked returns, which means the returns are dependent on the performance of the investment portfolio. The average annualized return for the NPS Tier 1 account has been around 10% over the last ten years. However, it is essential to note that past performance does not guarantee future returns.
NPS investment options
The National Pension Scheme offers three investment options- Active Choice, Auto Choice, and Default Choice. Active Choice allows investors to choose their asset allocation based on their risk appetite and financial goals. Auto Choice, on the other hand, is an age-based investment option, where the asset allocation is automatically adjusted based on the investor's age. Default Choice is a conservative investment option, where the funds are invested in fixed-income securities.
Active Choice
In this type of investment choice, the subscriber freedom to actively decide how his / her contribution is to be invested, based on personal preference. Up to 50 years of age, the maximum permitted Equity Investment is 75% of the total asset allocation and this equity allocation is reduced to 50% when the subscriber age 60 years old. This can be done to reduce risk in the old age of the subscriber. Percentage contribution value cannot exceed 5% for Alternative Investment Funds.
This asset allocation percentage can be changed twice in a year in the simple word... Subscribers can change asset allocation percentages two times a year.
| Age | Equity Allocation |
|---|---|
| 50 Years | 75% |
| 51 Years | 72.5% |
| 52 Years | 70% |
| 53 Years | 68.5% |
| 60 Years | 50% |
Auto Choice
In auto choice, the subscriber amount invested by 3 life cycles is below. Each cycle starts on maximum equity assets and equity allocates the amount at high risk to low-risk Government bonds and Corporate bonds.
Aggressive Life Cycle Fund For High Risk
This Life cycle fund provides a cap of 75% of the total assets for Equity investment. The exposure in Equity Investments starts at 75% to 35 years of age and gradually reduces as per the age of the Subscriber. In this scheme, Equity investment reduces by 4%, 3% and 1% per year up to 45 years, 50 Years and 55 Years Respectively.
| Age | Asset Class E |
|---|---|
| Up to 35 Year | 75% |
| 40 year | 55% |
| 45 Year | 35% |
| 50 year | 20% |
| 55 year | 15% |
Moderate Life Cycle Fund for Moderate Risk
This Life cycle fund provides a cap of 50% of the total assets for Equity investment. The exposure in Equity Investments starts at 50% to 35 years of age and gradually reduces as per the age of the Subscriber.
| Age | Equity Allotment |
|---|---|
| Up to 35 Year | 50% |
| 40 year | 40% |
| 45 Year | 30% |
| 50 Year | 20% |
| 55 Year | 10% |
Conservative Life Cycle Fund for Low Risk
This Life cycle fund provides a cap of 25% of the total assets for Equity investment. The exposure in Equity Investments starts at 25% to 35 years of age and gradually reduces as per the age of the Subscriber.
| Age | Equity Allotment |
|---|---|
| Up to 35 Year | 25% |
| 40 year | 20% |
| 45 Year | 15% |
| 50 Year | 10% |
| 55 Year | 5% |
Where do subscribers of the NPS fund get invested?
Subscribers of the National Pension System (NPS) can choose to invest their funds in either equity or debt instruments. The equity instruments comprise the Nifty 50, BSE 100, and Sensex 30 indices, while the debt instruments include government securities (g), corporate bonds (c), and fixed deposits of banks. Subscribers can also choose to allocate their investments across different asset classes through the Active Choice option. Additionally, there is a default investment option called the Auto Choice mode, which invests the funds based on the subscriber's age.
- E class (Equity = Stock Market)
- G class (Government Bond)
- C Class (Corporate Bond)
- A Class (Alternate Investment) e.g. Real estate, Infrastructure fund
Risk in Assets Classes
| Assets Class | Risk |
|---|---|
| Government Bond | Low |
| Corporate Bond | Moderate |
| Equity | High |
| Alternate Fund | Very High |
These intermediaries can include –
- Trustee banks
- Custodians
- CRA or Central Recordkeeping Agency
- NPS trust
- PoP or Points of Presence
- Annuity Service Providers.
National Pension Scheme (NPS) Benefits
Net Promoter Score (NPS) benefits businesses in multiple ways as it provides insights on customer loyalty and satisfaction. By calculating the NPS, companies can segment their customers into promoters, passives, or detractors, and respond accordingly. This enables them to focus on improving customer experience, which is key to retaining existing customers and attracting new ones. NPS can also help businesses identify areas where they need to improve their products or services, anticipate customer needs, and build long-term relationships with their customers. Overall, adopting NPS can provide a competitive advantage to businesses.
NPS Tax Benefits
One of the significant advantages of investing in the National Pension Scheme is the tax benefits it provides. The contributions made to Tier 1 accounts are eligible for saving income tax up to 2 lahks per year under section 80C of the Income Tax Act. Additionally, contributions made by the employer are eligible for tax deduction under section 80CCD (2) of the Income Tax Act. The withdrawals made from the Tier 1 account are also eligible for tax benefits, subject to certain conditions.
Option for Make a Partial Withdrawal
National Pension Scheme is a retirement scheme so that you cannot withdraw before retirement age (60 years the Government of India). So the lock-in period is 60 years in NPS but all schemes have Premature withdrawal so NPS has also Premature withdrawal.
Can Subscriber Premature Withdrawal from NPS?
yes, Premature Withdrawal is available after 3 years of regular investment. NPS allows a maximum of 3 partial withdrawals not exceeding 25% of the total contribution of subscriber-only (some NPS account companies also contribute to NPS). There should be a gap of five years between two withdrawals. The gap is reduced for medical emergencies. A member can make the first partial withdrawal only after 10 years of membership.
Withdrawal is allowed only for the specified reasons-
- Higher education for children
- Marriage of children
- For the purchase/construction of a residential house or flat in his or her own name or in a joint name with his or her legally wedded spouse. In case, the Subscriber already owns either individually or in the joint name a residential house or flat, other than ancestral property, no Withdrawal under these regulations shall be permitted.
- For treatment of specified illnesses - suffered by the Subscriber, his legally wedded spouse, children including a legally adopted child and dependent parents.
National Pension Scheme Calculator - What is it and how does it work?
The National Pension Scheme calculator is an online tool that helps investors estimate their retirement savings. It is a simple and user-friendly tool that requires investors to enter their age, contribution amount and expected retirement age. Based on these inputs, the calculator provides an estimated retirement corpus and a monthly pension amount.
NPS Calculator
| Monthly Contribution | |
| Expected Return | |
| Interest Add | |
| Current Age | |
| Retirement Age | |
| Maturity Value | |
| % withdrawal | |
| Annuity Expected Return | |
| Withdrawable Amount | |
| Pension per Month |
How to use the National Pension Scheme (NPS) Calculator
Using the National Pension Scheme calculator is easy and straightforward. Investors need to follow the below steps:
- Visit the above calculator.
- Enter your age, expected return, contribution amount, and expected retirement age.
- Click on the submit button.
- The calculator will display the estimated retirement corpus.
- Enter your withdrawal amount (%) and Annuity Expected Return.
- Click on the submit button.
- The calculator will display the withdrawal amount and the monthly pension amount.
NPS vs other retirement savings options
The National Pension Scheme is not the only retirement savings option available in India. Other popular options include Public Provident Fund (PPF), Employee Provident Fund (EPF), and Mutual Funds. While each option has its advantages and disadvantages, the National Pension Scheme offers several unique benefits, such as tax benefits, low-cost investment, and market-linked returns.
Why NPS is the best?
- Retirement Age Planning and enjoy
- No Government Support at Retirement in India
- Save Income tax up to 2 lahks per year under section 80C
NPS services and providers
The National Pension Scheme is managed by various Pension Fund Managers (PFMs), who are regulated by PFRDA (Pension Fund Regulatory and Development Authority). PFRDA body was created by the Government of India under the PFRDA Act 2013. The PFMs offer various services, such as account opening, fund management, and withdrawal services. Some of the popular PFMs include HDFC Pension Management Company, ICICI Prudential Pension Funds Management Company, and Kotak Mahindra Pension Fund.
PFRDA Roles and Functions:
- Develop and Regulate pension fund.
- Protect the interest of NPS subscribers.
- Approval of pension fund managers
PFRDA Body Approves Fund Managers.
The Pension Fund Regulatory and Development Authority (PFRDA) has approved the appointment of 7 pension fund managers as of 07-02-2020. The managers were selected through a tender process and will manage the funds of the National Pension System (NPS). They are as follows.
- LIC Pension Fund Limited
- SBI Pension Funds Pvt. Ltd
- UTI Retirement Solutions Ltd
- HDFC Pension Management Co. Ltd.
- ICICI Prudential Pension Fund Management Co. Ltd.
- Kotak Mahindra Pension Fund Ltd.
- LIC Pension Fund Ltd.
- SBI Pension Funds Pvt. Ltd.
- UTI Retirement Solutions Ltd.
- Birla Sun Life Pension Management Ltd
Pension Funds (PFs) for Government Sector
Pension Funds (PFs) for Private Sector
Conclusion
The National Pension Scheme is an excellent retirement savings option that offers several benefits to investors. It provides tax benefits, low-cost investment, and market-linked returns. The National Pension Scheme calculator is a useful tool that helps investors estimate their retirement savings. By following the tips mentioned in this article, investors can maximize their NPS investment and secure their future.
Frequently Asked Questions (FAQs) about NPS
Can subscribers continue NPS before retirement?
yes, A subscriber can continue to contribute to an NPS account beyond Retirement (Up to 70 years) and avail of additional tax benefits on the contribution. The subscriber can defer his/her Withdrawal and stay invested in NPS up to 70 years of age. The subscriber can defer only lump-sum Withdrawal, defer the only Annuity or defer both lump sum as well as Annuity.
Can subscribers defer (start pension before retirement) NPS before retirement?
yes, If you want to exit before 60 years, you can withdraw only 20 per cent of the corpus. You must buy an annuity with the remaining 80 per cent of the corpus.
Can individual subscribers exit before retirement?
yes, Individual subscribers have the option to exit this plan before retirement or opt for superannuation. Lump-sum withdrawal of up to 40% of an NPS corpus after a subscriber turns 60 is exempt from tax.
For example, up to 60 years of age if the total fund in the National Pension System amounts to Rs. 20 Lakh, a lump sum withdrawal of 40%, i.e., Rs.8 lakh will not attract any tax. Further, if you utilise the remaining 60% of funds for annuity purchases, the entire corpus will be tax-free. Only that, income generated from the annuity will be taxable.