What is NPS?

The National Pension System (NPS) is a government-sponsored pension scheme in India, aimed at providing financial security during retirement. It is a voluntary, defined contribution retirement savings scheme designed to enable systematic savings during an individual's working life. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is available to all citizens of India, including both private sector employees and self-employed individuals.

Benefits of NPS

• Tax Benefits: Contributions made to the NPS are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act. The total deduction can go up to ₹2 lakh per year.
• Market-Linked Growth: NPS funds are invested in a diversified portfolio including equities, government bonds, corporate bonds, and alternative assets, providing the potential for higher returns compared to traditional fixed-income investments.
• Low Cost: NPS is one of the lowest-cost pension schemes available, ensuring more of your money is invested rather than spent on fees.
• Flexibility: Investors can choose their investment mix and switch between different pension fund managers.
• Portability: NPS accounts are portable across jobs and locations, making it convenient for individuals who may change employment.
• Regular Income Post-Retirement: At retirement, a portion of the corpus can be withdrawn as a lump sum, and the rest is used to purchase an annuity, ensuring a regular income.

Formula with an example

Computing the Corpus
The corpus accumulated in the NPS account can be calculated using the compound interest formula for recurring deposits
A = P * (((1 + r)^n - 1) / r) * (1 + r)

Where:

• A = Final amount (corpus)
• P = Monthly contribution
• r = Monthly interest rate (annual rate divided by 12)
• n = Total number of contributions (months)

Example: Suppose you contribute ₹5,000 per month for 30 years with an annual interest rate of 10%.

Using the formula:
Monthly contribution P=5,000
Monthly interest rate r=10%/12 months= 0.00833

Total number of contributions= n=30×12=360
A= 5,000x[{(1+0.0083333)^360}-1]x(1+0.0083333)/0.0083333
A=5,000x(2279.3058)
A= 1,13,96,529

So, the corpus accumulated after 30 years would be ₹1,13,96,529

Maturity: 60% Lump Sum and 40% Annuity

Lump Sum Calculation:
60% of the corpus can be withdrawn tax-free.
Lump Sum Amount: 60%×1,13,96,529 = 68,37,917

Annuity Calculation:
40% of the corpus must be used to purchase an annuity.
Annuity Amount: 40%×45,58,612

If the annuity rate is 6%, the annual annuity income can be calculated using the formula for simple interest:

Annual Annuity Income=P×r/n
Where:

• P = Annuity Amount
• r = Annuity Rate
• n= tenure

Annuity Income=45,58,612×6%/12
Monthly Annuity Income: = 22,793

So, the individual would receive ₹1,13,96,529 as a lump sum at retirement and ₹22,793 per month as annuity income.

Mool Finance NPS Calculator Benefits

• Accurate Projections: Helps users accurately project the corpus accumulated over the investment period.
• Flexible Inputs: Allows users to input different contribution amounts, interest rates, and time periods to see varied outcomes.
• Clear Breakdown: Offers a clear breakdown of the lump sum and annuity portions at maturity.
• User-Friendly Interface: Easy to use, making it accessible even to those with limited financial knowledge.
• Inflation Adjustment: The calculator includes options to account for inflation, helping you understand the real value of your retirement savings.

Conclusion

NPS is an excellent long-term investment option for retirement planning, offering a blend of security, tax benefits, and market-linked returns. The Mool Finance Calculator simplifies the process, making it easier for individuals to plan their retirement effectively and maximize their financial well-being.