How is NPS calculated? Read here

NPS refers to the . As discussed in previous articles, this is a scheme wherein an employee contributes an amount regularly till retirement, to receive it as pensions in old age when one is voluntarily unemployed. Before examining how NPS is calculated, let us explore how to invest in it and what are the different types of NPS.

How to open an NPS Account

The PFRDA (Pension Fund Regulatory and Development Authority of India) makes all decisions concerning the NPS and offer both offline as well as online modes to create an account:

Offline Mode: If you wish to sign up manually (offline mode), you will need to locate a nearby Point of Presence (PoP0. This could even be a nearby bank, where you collect a subscriber form and submit it along with 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.

Online Mode: In the highly digitalised world that we live in, today, you can create this account in a mere half an hour. The only underlying condition is that the account must be linked with your Aadhar. PAN Card and mobile number. You can generate a One time Password (OTP) and thus create your PRAN.

Types of NPS Account

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. 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
  Maximum NPS contribution No limit No limit

The Tier-I account is mandatory for everyone who opts for the NPS scheme. The Central Government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

How is NPS Calculated?

Just like the majority of calculations, the NPS can also be calculated using an online calculator; available on the Bajaj website too. 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

Once all the inputs have been entered, the NPS calculator will simultaneously begin computing the investment and pension amount you can expect at the time of maturity.

The calculator generates a summary of your pension account at the time of retirement with the total amount you would have contributed during the period and the corpus generated on maturity.

Also, the NPS calculator computes your expected monthly pension that you would receive based on the returns you expect on the Annuity.

Here is an example to help you understand how the NPS calculator computes your monthly pension.

Mr Raj is a 25-year-old central government employee. He subscribes for the National Pension Scheme and decides to contribute Rs 2,500 every month towards the scheme. NPS matures when the subscriber turns 50 years of age.

Meaning, Vineeth will able to contribute for the next 25 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 7% rate of return on the annuity.

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

  • Total investment: Rs 7,50,000
  • Total corpus generated: Rs 33,44,725.86
  • Also, a summary of his pension account would be generated by the calculator.
  • Lump sum value: Rs 20,06,835.52
  • Expected monthly pension: Rs 15,534.04

Therefore, calculating your pension is as easy as opening an NPS account today and vice versa. Just visit Bajaj Finserv for details on the same and use their calculator.



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