NPS Calculator: How the National Pension Scheme works

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A pension scheme provides a fixed income for a number of years after retirement. In New Pension Scheme, pension seekers contribute towards their pension, which the government matches. NPS Calculator helps you to calculate your expected pension in the time and place of your choice.

What is NPS?

NPS is the short form for National Pension Scheme. Previously the government paid pension for 10 months to the retired pensioner. Now under a new scheme, a person will have to ‘contribute’ towards his pension, which the government will match.

The main purpose of this new pension scheme is to provide financial security to a retired person while reducing government liability. The New Pension Scheme also carries the short form of National Pension Scheme i.e. NPS.

NPS was introduced for government employees from 2004 onward. And, from 2009 onward, it was introduced to private company employees. It is controlled by Pension Fund Regulatory and Development Authority (PFRDA).

Age Criteria for Investing in NPS

Between 18 and 60 years.

There are two tiers in the revised NPS. Alongside there is NPS Lite scheme for people under BPL.

Tier I – In this account you cannot make any withdrawal as the entire amount will go towards pension. Employers contribute to this account.

Tier II – This is an additional account which can be opened alongside the Tier I account. From here money can be withdrawn after 5 years with an intervening gap of 2 years between two withdrawals.

NPS Lite or Swavalamban Scheme – This scheme is for people under BPL. Account holders receive Rs. 1,000 from the government for the first 4 years, effective from FY 2010-11. This benefit has also been extended to accounts opened in FY 2009-10. In this scheme, there are no restrictions on withdrawals.

Minimum Contribution

Rs. 6,000 premium every fiscal year. It earns an annual compound interest, adding to your fund value.

Service Charge

The government sector investors must pay 0.0102% and private sector investors 0.25% of the entire amount invested in NPS as service charge.

New Pension Scheme has 3 different components:

NPS has 3 components, viz.: Equity (E), Credit Debt (C) and Government Annuity (G). E is high return and high risk. G has the most conservative return but low risk.

You can either decide your investment amount in ‘Active’ account; otherwise, investment will be done automatically.

In the Automatic setup, between ages 18 to 35, 50% will be invested in E, 30% in C and 20% in G.

After 35 till the age of 55, the amount put in E will decrease with continuously while that in G will increase.

After 55, 80% will be put in G and 10% each in E and C.

Rate of Interest in NPS

Since NPS is market-linked, rates of interest will vary as per market conditions.

Withdrawal Terms

Before the retirement age of 60, only 20% of the amount in the account can be withdrawn.

Upon attaining the age of 60, you can withdraw 60% and invest 40% in annuity plan.

If, however, the amount in NPS is less than 2,00,000, the entire amount can be withdrawn in lump sum.

If the pensioner dies before attaining the age of retirement, then the nominee or heir can withdraw about 60% of the entire amount and invest 40% of the entire amount in annuity.

The Fund Managers

There are 7 fund managers since 2008: HDFC, ICICI, Kotak, SBI, Reliance, UTI and LIC.

The New Pension Scheme holder can change fund managers in a year free of cost.

Tax Benefit

Under New Pension Scheme, an investor can claim tax benefit under Sections 80CCD(1), 80CCD(2), and 80CCD(1B) , not exceeding 10% of basic salary + DA. This is applicable only to Tier I accounts.

Under 80CCE, investors can claim tax benefits on their employer’s contribution to NPS, not exceeding 10% of basic + DA.

Companies too can claim tax exemptions in their P&L statement.

Tier II accounts like mutual funds.

What will the NPS Calculator do?

The NPS calculator calculates how much pension you can draw. You have to give our present age, how much you can deposit in your account each month and the current rate of interest. The scheme bears an annual compounded rate of interest. All these factors will be taken into consideration by the calculator and provide an estimate of you pension. The amount will only be an approximation since the new pension scheme is market linked and interest rates may fluctuate. Moreover, over the years tax rules may change.

Most NPS fund managers will provide their own NPS calculator. Online versions of the calculator are also available.

Since NPS calculator is web-based tool, no APPs or plug-ins are required to use it.

Pros

• The NPS calculator is a web-based tool, and, no APPs or plug-ins are required to use it.

• You can calculate your expected pension at your own convenience.

Cons

• It does not take into account the fluctuating interest rates.

• It also does not factor in possible variations in tax.

Therefore, calculations are approximations.

Why choose NPS and what good is NPS Calculator?

New Pension Scheme is market-linked, and, therefore, its rate of interest may vary each fiscal year. Tax rates may also fluctuate. But, it is a Government scheme, and, therefore, a 100% safe investment. Its returns are also better than PF or EPF.

NPS will provide secure pension for a set number of years. But, how much an investor should contribute and what would be his expected return will be provided by NPS Calculator. NPS Calculator provides a very close estimate of expected pension.