The National Pension Scheme (NPS) is a voluntary, defined contribution retirement savings scheme launched in 2004 for government employees which was later extended in 2009, to all the Indian citizens working in both organised and unorganised sectors. As of May 2019, there are nearly 1.25 crore NPS accounts and Rs. 3.3 lakh crores of assets under management1. NPS returns are usually delivered by NPS Pension Fund Managers and the returns are not fixed but are market-linked. The returns vary depending on a bunch of factors like the type of accounts, age and contribution limit, and fund performance and asset classification.
If you are a subscriber, you can access two types of accounts – Tier I and Tier II, with your allotted permanent retirement account number (PRAN). A tier I account is a permanent, non-withdrawable account until you retire. On maturity at the age of 60, 60 percent of the fund can be withdrawn as a lump sum with full tax exemption, and the 40 percent must be compulsorily used to buy an annuity plan, that shall pay out a monthly pension based on its corpus.
On the other hand, a tier II account is a voluntary retirement-cum-savings plan from which you can invest or withdraw money as per your convenience, and the subscribers can claim tax benefits on Tier II accounts contributions but with lock-in period of three years, making it on par with Equity Linked Savings Schemes. If you go for a premature exit after 3 years, you can only withdraw 20 percent of the accumulated corpus and the withdrawal is taxable as per your slab rate. The remaining 80 percent shall be invested in an annuity that’s taxable.
Asset Classification and Fund Managers
Based on your risk appetite, you can segregate the corpus among different asset classes – Equity, Government Bonds, Corporate, and Alternate assets by selecting one of the 8 Pension Fund Managers in the National Pension Scheme. Your NPS returns depend on asset allocation and the performance of the chosen pension fund managers . Each of the asset classes have growth rates that can help you in working out the compounding rate in them.
Age and Asset allocation
The earlier you start contributing to the NPS, the longer time your money will have to grow and higher shall be the NPS returns. As you age, the equity asset allocation of the selected pension fund starts to taper off and shift towards debt asset allocation to minimise the risks.
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The NPS calculator is a unique aid that can be utilised to estimate the kind of returns that you are likely to get on your investment in the National Pension Scheme by the time your retire. The NPS calculator typically factors fields like date of birth, contribution frequency, expected rate of return, annuity purchase, and the annuity rate. The results shown by the NPS calculator will provide you with data on the amount invested, and a breakup of returns earned in lump sum pay out and the annuity corpus, and the annuity amount.
Image Illustration of NPS Calculator
For instance, a person currently aged 36, who invests Rs.15,000 per month for a period of 24 years with an expected 12 percent rate of return, accumulates a total corpus of Rs. 2.5 crore on an investment of Rs. 43.2 lakhs. Upon retirement, he receives a lump sum pay out of Rs. 1.5 crore and the remaining Rs. 1 crore is used to buy an annuity plan that shall pay him a monthly pension of Rs. 50,181 during his life post retirement.
These results are approximate and are subject to the following limitations:
- As NPS is market-linked, the corpus amount is not the exact figure, but an estimate on the basis of user input.
- The NPS calculator uses the compound interest calculator to give out the figures and thus there is a difference between the actual returns and the estimated corpus.
- The growth of annuity corpus is also market linked and thus the deviation between the actual and estimated figures need to be taken into consideration.
The NPS returns are completely market linked and depend on the performance of the funds. So, it is highly recommended to choose your fund managers and asset allocation wisely for maximum NPS returns on your investment. If you are a no-vice in fund selection, it is wise to go with the ‘Auto choice’ option that decides the fund and asset allocation for you, until you gain substantial knowledge on the investment game. Choosing the right annuity plan is also as important as putting money into the NPS. The better features the annuity plan entails, the lower the annuity rate, and so would be your monthly pension.
The NPS is now available online on platforms such as Finserv MARKETS that completely does away with tedious paperwork to open an NPS account. On Finserv MARKETS, the NPS account allows you to select from a host of investment options and fund managers, allowing flexibility of switching between investment plans and fund managers. The flexibility of investment distribution can be made using the Auto or Active choice options. The NPS account is accessible online and can be operated from anywhere on the planet.
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