Build Your Retirement Corpus by Investing Your Money In NPS

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Building your retirement corpus involves a series of steps. These include diversifying your investments in private and public sector schemes hence hedging your risks effectively. You can start by making long term Systematic Investment Plans (SIPs), going for Fixed Deposit schemes and even selecting pension plans. 

While there are several pension funds plans offered today by private corporates, it is the National Pension Scheme (NPS) which always stands out. The NPS was born in 2004. The main goal was, to allow the common man a source of income even after retirement. The main reason was that, several expenditures occur in one’s old age. 

Examples of these expenses would be children’s education, marriage, etc. This is where the NPS helps a lot. In the NPS, an employee contributes an amount (mostly deducted from his/her salary) on a regular basis till retirement.  Then he/she receives it as pension in old age in the form of monthly instalments.

Ways to create an NPS Account

The PFRDA (Pension Fund Regulatory and Development Authority of India) decides on all matters concerning the NPS. It allows users to use both offline as well as online modes to open an account: 

Offline Mode: In order to physically sign up (i.e. in an offline mode), the user must go to a nearby Point of Presence (PoP). It is here that one collects a subscriber form and submits it along with all necessary KYC documents. Once you make the initial investment, the PoP will send you a PRAN (Permanent Retirement Account Number). This number and password in your packed welcome kit at the cost of a one-time fees of Rs 125 would help you use your account. 

Online Mode: In recent times, going all the way to a bank or even government offices seem like a big task. This is simply because, now, almost everything is available at the end of our screens. The basic requirement is that your account must be linked with your Aadhar, PAN Card and mobile number, to create it digitally. Once it is, you can generate a One-time Password (OTP) and thus create your PRAN. 

Types of NPS Account

Tier 1 is a default provision; Tier 2 is just an option The table below explains the two account types in detail.  

   ParticularsNPS Tier-I AccountNPS Tier-II Account
  StatusDefaultVoluntary
  WithdrawalsNot permittedPermitted
  Tax exemptionUp to Rs 2 lakh p.a.(Under 80C and 80CCD)1.5 lakh for government employees Other employees-None
  Minimum NPS contributionRs 500 or Rs 500 or Rs 1,000 p.a.Rs 250  

The Central Government employees have to contribute 10% of their basic salary. For both the tiers, there is no Maximum limit for the contribution amounts. 

NPS Returns Calculator

It is always easier to invest in something if we have an idea of what kind of returns will our money give. Now, estimating this manually for a scheme over 20-30 years is obviously tedious. However, for the NPS it can be calculated using an online calculator. This calculator requires you to input the following fields: 

  • Present Age
  • Retirement Age
  • Contribution towards NPS per month
  • Expected rate of return on NPS Investment
  • Annuity Period
  • % Of pension wealth invested as annuity
  • Expected rate of return on annuities

The NPS calculator will generate the lump sum figures you will receive at the time of maturity, as well as the monthly pension amounts. The latter would of course depend on what your expected rate of return is. 

Here is an example to help you understand how the NPS calculator computes your monthly pension.

Mr Gupta is a 25-year-old private sector employee. He subscribes for the National Pension Scheme and decides to contribute Rs 7000 every month towards the scheme. NPS matures when the subscriber turns 60 years of age. Meaning, Mr. Gupta will able to contribute for the next 35 years towards the scheme and expects an investment of 8% per annum. In the same line, he would like to purchase an annuity for 40% and expect a 6% rate of return on the annuity.

The status of Mr Gupta’s pension account at retirement as generated by the NPS calculator will be as follows:

  • Total corpus generated: Rs 1,61,64,226
  • Annuity Purchased: Rs 64,65,691
  • Lump sum value withdrawable on maturity: Rs 96,98,535
  • Expected monthly pension: Rs 32,329

Hence, building your retirement corpus must start with the NPS and of course you may opt for some good Fixed Deposit Plans eventually.