Contribute to NPS: All You Need to Know

The Indian government introduced the National Pension Scheme (NPS) to encourage individuals to save for their retirement. The NPS is a voluntary scheme designed to help people build a retirement corpus. Initially launched for government employees on January 1, 2004, the scheme was later expanded to all Indian citizens on May 1, 2009. The Pension Fund Regulatory and Development Authority (PFRDA) oversees it.

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Disclaimer: The corpus of ₹1 Crore is an illustrative example and is not guaranteed. It is based on the assumption of an 8% annual rate of return over a 30-year investment period, for an investment of 10000/month, starting at age 25. Actual returns may vary depending on market conditions, policy term, premium payment term, and other factors. The investment risk in unit-linked insurance plans (ULIPs) or market-linked instruments is borne by the policyholder.Maturity Value: ₹1,10,89,478 @ CAGR 8%; ₹55,66,122 @ CAGR 4%. Returns are subject to market performance and are not guaranteed. Tax benefits, if any, are as per prevailing laws and may change from time to time. All plans mentioned are offered through insurance company funds and are subject to associated terms and conditions. Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

How Does an NPS Work?

NPS is a pension scheme that allows you to make regular contributions towards your retirement. Professional fund managers manage these investments, ensuring potential growth over time.

At the age of 60, you can withdraw 60% of your corpus from the National Pension Scheme, while the remaining 40% must be used to purchase an annuity. This annuity ensures a steady income stream during retirement. There are two ways to contribute to NPS, each offering distinct benefits. Let's explore the details of the different account options under the National Pension Scheme.

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NPS Calculator

Your Age

18 Years 59 Years
Enter Your Age

Monthly Investment

₹500 ₹10L
Enter Investment Per Month

Expected Return on Investment

5% 15%
Expected Return on Investment

Percentage of Corpus Allocated for Pension

40% 100%
Enter Corpus Percentage

Expected Return from Pension

5% 15%
Enter Annuity Return
₹0
Your Monthly Pension
₹0
Your Monthly Pension
Your Pension Calculation
Your Pension Calculation
Total Investment
Returns Earned
Maturity Amount
Maturity Amount split (Lumpsum & Pension)
60%
Lumpsum Amount
At the age of 60 Yrs
40%
Pension Wealth
At the age of 60 Yrs

What are the Account Types Under the NPS?

The NPS offers two types of accounts: Tier I and Tier II. The Tier I account is intended for retirement savings, providing various tax benefits, but withdrawals are restricted until the individual reaches the age of 60. In contrast, the Tier II account has no such limitations, allowing withdrawals at any time.

The Tier I account is mandatory when opening an NPS account, while the Tier II account can only be opened after the Tier I account is active, through a separate application.

Although the Tier I account has restrictions, partial withdrawals are allowed under specific circumstances, such as for medical emergencies, children's education, marriage expenses, or purchasing or constructing a house. The structure encourages long-term saving for retirement.

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What are the Advantages of Contributing to the NPS Account?

Listed below are the key advantages of contributing to the NPS account:

  1. Flexibility

    NPS offers great flexibility for subscribers. If you're dissatisfied with the performance of your fund, you have the option to change your fund manager. You can easily download the change request form online or pick it up from your nearest Point of Presence (POP). A small transaction fee applies when changing the fund manager. Additionally, NPS allows you to move your investments between different asset classes, such as government securities, corporate bonds, and stocks.

  2. Stabilisation of Risk-Returns

    NPS ensures a stable balance between risk and returns. The scheme limits equity exposure to 75%, but for government employees and senior citizens, this cap is reduced to 50%. As you age, particularly once you reach 50 years old, your equity allocation decreases by 2.5% annually. This gradual reduction helps mitigate risk as you approach retirement, offering a more stable investment path in the long term.

  3. Returns

    For Tier I accounts, the minimum contribution is ₹500 per deposit, with a requirement of at least ₹1,000 in total annually. There's no limit to the number of contributions you can make throughout the year. For Tier II accounts, the minimum contribution per deposit is ₹250, with no annual minimum requirement. This provides flexibility for those looking to make smaller, more frequent contributions without a set yearly commitment.

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How Helpful is an NPS Calculator?

The power of compounding each month makes NPS a strong choice for retirement. Using an NPS calculator helps you understand the lump sum amount and pension that you will receive when you retire. All you need to do is contribute to your NPS account every month.

The formula to be used on an NPS calculator in India is
A = P (1 + r/n) ^ nt
Terms used in NPS Calculator
A
Total amount at maturity
P
Monthly contribution
r
Annual interest rate (in decimal form)
n
Number of times interest is compounded in a year
t
Number of years of investment

Key Takeaway

  • Retirement planning can be difficult because it's hard to know how much money you’ll need later.

  • You can start by taking the average years post-retirement and multiply that by your yearly spending or income.

  • Don’t forget to include extra costs like rising prices (inflation), medical bills, or emergencies.

  • A smart move is to use the NPS (National Pension System) as your main savings tool.

  • Also, add other savings options to make sure you have enough money for a comfortable retirement

Frequently Asked Questions

  • What is the requirement for NPS contribution?

    To keep your NPS account active, you need to contribute at least ₹500 each time and a minimum of ₹1,000 in a year. There is no upper limit, so you can invest more based on your financial goals.
  • Is it worth contributing to NPS?

    Yes, contributing to NPS is a smart choice for building a retirement fund. It offers good returns over the long term, tax benefits, and is regulated by the government, which makes it a safe and reliable option for retirement planning.
  • Can I contribute to NPS on my own?

    Yes, you can contribute to NPS on your own at any time. You don’t need an employer to do it for you. Contributions can be made easily online through the NPS website or app, making it very convenient for individuals.

˜Top 5 plans based on annualized premium, for bookings made in the first 6 months of FY 24-25. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
NPS Calculator

Your Age

18 Years 59 Years
Enter Your Age

Monthly Investment

₹500 ₹10L
Enter Investment Per Month

Expected Return on Investment

5% 15%
Expected Return on Investment

Percentage of Corpus Allocated for Pension

40% 100%
Enter Corpus Percentage

Expected Return from Pension

5% 15%
Enter Annuity Return
₹0
Your Monthly Pension
₹0
Your Monthly Pension
Your Pension Calculation
Your Pension Calculation
Total Investment
Returns Earned
Maturity Amount
Maturity Amount split (Lumpsum & Pension)
60%
Lumpsum Amount
At the age of 60 Yrs
40%
Pension Wealth
At the age of 60 Yrs

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