The NPS was created and started in 2004 with the aim to allow the common man a fixed source of income even after retirement. This was mainly because there were certain crucial occasions, in one’s old age, which demanded heavy expenditures. You should definitely invest in NPS because at a minimum subscription it gives you a wide corpus of returns.
It is rather tough to try 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 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:
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. In case you are already KYC compliant with the bank, you can directly submit the form. 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.
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.
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|
|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, just like FDs can. For NPS the 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 Ram is a 26-year-old government employee. He subscribes for the National Pension Scheme and decides to contribute Rs 1000 every month towards the scheme. NPS matures when the subscriber turns 60 years of age. Meaning, he will able to contribute for the next 34 years towards the scheme and expects a return on investment (ROI) of 7% per annum. In the same line, she would like to purchase an annuity for 40% and expect a 7% rate of return on the annuity.
The status of Mr. Ram’s pension account at retirement as generated by the NPS calculator will be as follows:
- Total corpus generated: Rs 16,77,808
- Annuity Purchased: Rs 6,71,124
- Lump sum value withdrawable on maturity: Rs 10,06,084
- Expected monthly pension: Rs 3,915
It is the National Pension Scheme (NPS) which gives the best of returns even with minimal subscriptions.
In fact, Bajaj Finance’s Online FD calculator allows one to calculate the FD maturity in a similar way by entering the rate of interest and time period.
Hence both NPS and Bajaj Finance Corporate FD should be your first investment options among others due to their ability to generate safe-good returns.