One crucial aspect of planning for the future involves considering your financial situation and stability for much later on and making provisions for these. One useful way to go about this can be by building a retirement corpus via the National Pension Scheme (NPS) up to the age of 60 years. This voluntary plan can allow you to deposit funds into an NPS account on a periodic basis and save for your better years.
Post your retirement, you can receive compounded returns as part of your pension, along with several other utilities for the present. These can range from high interest rates, tax saving benefits and more. Find out more about NPS and its useful features, along with the ways to calculate its interest rates.
What is NPS?
The National Pension Scheme was launched as a social security programme by the Central Government. Besides members of the military services, employees from the private, public and unorganised sectors are eligible for this pension system.
The programme encourages participants to make periodic contributions to their pension accounts while they are still employed. Subscribers can withdraw a specified amount of the corpus after retirement. Afterwards, you can get the leftover sum as a monthly pension, as long as you hold an NPS account.
Previously, only Central Government employees had been eligible for the NPS programme. This meant that such staffers who had begun employment on or after January 1, 2004, were required to get NPS coverage. However, the Pension Fund Regulatory and Development Authority (PFRDA) has now opened it to all Indian nationals on a voluntary basis.
As part of the initial process, you will be given a Permanent Retirement Account Number (PRAN). It is a unique 12-digit number used to identify you as an NPS account holder. Besides the regular Tier-I account, you can opt for a Tier-II account wherein your initial contribution will be ₹1,000, and a minimum of ₹250 for each subsequent one.
Why should you invest in NPS?
NPS is considered to be a good scheme for you if you are looking to plan your retirement from much earlier on and have a low-risk appetite. Having a regular source of income after your retirement will be quite useful, notably for those working within the private sector.
Such a systematic investment can help make a large-scale impact on your post-retirement life, and its tax-saving benefits can help you make the most out of deductions under Section 80C of the Income Tax Act, 1961.
Here are some other features and benefits of NPS investments:
- Low-cost investments
NPS is considered to be one of the lower-cost investments that you can make as it requires a minimum contribution of ₹1,000 during each financial year and a contribution amount of ₹500 per deposit. There are no other limitations or mandates in this form of investment and can be done freely at your convenience.
- Market-linked returns
The returns gained in an NPS account are linked to the market, and is dependent on the performance of assets that have
By choosing NPS, you can enjoy the benefit of portability, i.e. the flexibility to keep the same PRAN across different cities, occupations and employers. This means that it will stay unaffected if you make such shifts during your working period.
With an NPS account, you can freely choose your preferred fund manager in case your returns on investment are not up to par. This can be applicable if you are a holder of both Tier-I and Tier-II accounts.
NPS account investments can help provide diversification in your portfolio, as they can provide you with high returns in comparison to certain debt instruments. This can be beneficial in ensuring you get varied returns from all your investments.
Now that you have learned more about NPS, find out how you can calculate the interest provided by it:
NPS Interest Calculation
The NPS interest rates can range between 9-12% p.a. across four asset classes, namely equity, government debt, corporate debt, and alternative assets. These can also vary across Tier-I and Tier-II accounts. In addition, the interest earned in this scheme is compounded annually.
For instance, if you are a 30-year-old investor who makes a monthly contribution of ₹1,000, then your overall principal amount up to the age of 60 years can be calculated as:
1,000 x 12 x 30 = ₹3,60,000
Assuming you are earning an interest rate of 10%, your annual interest for the first year will be:
1000 x 12 x 10 / 100 = ₹1,200
This amount will then be added to your principal as part of compounded earnings, for a total of ₹13,200. The next annual interest calculation will then consider this amount as the new principal and determine the interest rate accordingly. This is considering the added contribution of ₹1,000 for the next year. The interest for the second year will now be:
13,200 + 1000 x 12 x 10 / 100 = ₹2,520
This amount will then be further compounded with each passing year up to the age of retirement. By the end of 60 years, you can get a total maturity amount of ₹22.60 Lakhs. You can also make use of interest calculators found online to get an exact understanding of your potential returns as per a specific monthly investment amount, expected NPS interest rate, and age.
Opting for NPS as a means to financially secure your retirement potentially can be highly beneficial for you in the long run, owing to its various other features. However, it is important to consider your investment goals and risk tolerance before making such investment decisions. This will help you plan accordingly and make monthly contributions as per your preferences.