Reasons Why Investing in NPS Would Be a Wise Decision

Reasons Why Investing in NPS Would Be a Wise Decision

The very basis of investing is to manage your finances for the future, using the money of the present. Building your retirement corpus involves a series of steps. These include 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 corporations, 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 crucial occasions and hence expenditures occur in one’s old age. Investing in it is a wise decision because it helps you handle these, at a minimum subscription to give a wide corpus of returns.

This included education of children, their marriage, spending on certain luxuries, etc. The biggest challenge becomes, trying to maintain the same social and financial status without a ready source of income due to retirement. 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 a pension in old age in the form of monthly instalments. Hence, the void of a salary in old age is filled.

Creating 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). Usually, the nearest PoP is a bank. 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 has become unheard of. This is simply because with the excellent technology and communication systems, 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. How To Choose the Right Insurance Plan for You

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.

   Particulars NPS Tier-I Account NPS Tier-II Account
  Status Default Voluntary
  Withdrawals Not permitted Permitted
  Tax exemption Up to Rs 2 lakh p.a.(Under 80C and 80CCD) 1.5 lakh for government employees Other employees-None
  Minimum NPS contribution Rs 500 or Rs 500 or Rs 1,000 p.a. Rs 250

The Central Government employees have to contribute 10% of their basic salary.

Tool to estimate returns on NPS

The NPS’s finances 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

With the above-mentioned variables, 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 Oberoi is a 29-year-old private sector employee. He subscribes for the National Pension Scheme and decides to contribute Rs 7500 every month towards the scheme. Meaning, Mr. Oberoi will be able to contribute for the next 31 years towards the scheme and expects a return on investment (ROI) of 10% per annum. In the same line, he would like to purchase an annuity for 40% and expect a 5% rate of return on the annuity.

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

Total corpus generated: Rs 1,89, 80, 031

Annuity Purchased: Rs 75,92,013

Lump sum value withdrawable on maturity: Rs 1,13,88,018

Expected monthly pension: Rs 31,634


Bajaj Finance offers you an online calculator for the same. After understanding the entire process, it is rather clear that investing in the NPS is a wise decision simply because of the great returns it provides despite seeking the minimum investment that it requires.


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