What is NPS?
NPS, or the National Pension System, is a government-backed retirement savings scheme regulated by the PFRDA. You contribute regularly during your working years, your money is invested in a mix of equity, corporate bonds and government securities, and the savings grow until you retire.
The account matures when you turn 60. At that point you can take part of your savings as a lump sum, and the rest is used to buy an annuity that pays you a regular pension for life.
Because part of the money can be invested in equity, NPS returns are market-linked and not guaranteed. Over long periods, this gives it the potential to grow faster than fixed-return schemes.
Fun fact
NPS is one of the lowest-cost investment products in India. Its fund management charges are a fraction of a percent a year, so more of your money stays invested.
What is an NPS Calculator?
An NPS calculator estimates how much your NPS savings will be worth when you turn 60, based on how much you invest each month, the return you expect and your current age.
The result is an estimate. Actual returns depend on how the markets and your chosen fund perform, and the maturity amount is before the annuity purchase and any tax.
Why you should use an NPS Calculator?
- Plan your retirement: See how big your retirement savings could be, and whether they are likely to cover your needs.
- See the value of starting early: Change your age to see how much more you build by starting a few years earlier.
- Choose a contribution: Try different monthly amounts to find one that reaches your retirement goal.
How Does an NPS Calculator Work?
The NPS calculator works on the following inputs:
- Monthly Investment: The amount you contribute every month.
- Expected Return Rate: The yearly return you expect your NPS fund to earn.
- Your Age: Your current age. You keep investing until you turn 60.
The calculator relies on the following formula:
M = P × [((1 + i)^n − 1) ÷ i]
- M
- Maturity amount at 60
- P
- Monthly investment
- i
- Monthly rate of return (yearly rate ÷ 12 ÷ 100)
- n
- Number of months until you turn 60
This assumes you contribute at the end of each month, and that returns compound every month.
Formula to Calculate NPS with an Example
Consider an example for a better understanding.
- Monthly Investment: ₹5,000
- Expected Return Rate: 10% per annum
- Your Age: 30 years, so 30 years (360 months) of investing
Using the formula:
M = 5,000 × [((1.00833)^360 − 1) ÷ 0.00833]
After calculation, the maturity amount is about ₹1,13,02,440. You invest ₹18,00,000 in total, and earn about ₹95,02,440 in returns.
Things to keep in mind
- Annuity at maturity: At 60, part of your savings must be used to buy an annuity for a monthly pension. Only the rest can be taken as a lump sum.
- Tax benefit: In the old tax regime, you can claim an extra deduction of up to ₹50,000 a year for NPS contributions under Section 80CCD(1B), on top of the ₹1,50,000 limit of Section 80C.
- Choose your mix: You can pick how much goes into equity, or let the fund reduce equity automatically as you get older.
- Long lock-in: NPS is meant for retirement, so withdrawals before 60 are limited. Invest money you won’t need until then.