What is NPS? How the National Pension System Works
NPS is a government-backed voluntary retirement savings scheme that helps individuals systematically save for retirement. You contribute monthly or annually during your working years, and at retirement (typically age 60), the accumulated corpus is used to provide a lump sum and a regular pension (annuity).
How Does the National Pension System (NPS) Work?
- You invest a fixed amount regularly (monthly/yearly) into your NPS account.
- The money is invested in a mix of equity, corporate bonds, and government securities, generating market-linked returns.
- At retirement, a portion of your corpus is withdrawn as a lump sum, and the rest is used to buy an annuity for monthly pension.
NPS Retirement Corpus & Pension Calculation Explained
The NPS calculator estimates your retirement corpus and monthly pension based on:
- Monthly Contribution (P): Amount you deposit every month
- Expected Annual Return (r): Average returns from NPS investments (typically 8%–12%)
- Years to Retirement (n): Calculated as
60 - current age - Annuity %: Portion of the corpus used to buy pension
- Annuity Return: Annual return from the annuity plan, used to calculate monthly pension
Annuity in NPS: What You Need to Know
At the time of retirement, you are required to use at least 40% of your NPS corpus to purchase an annuity from a registered insurer. The annuity ensures a regular monthly pension after retirement. You can choose a higher annuity percentage (e.g., 50%, 60%) for a larger pension.
The remaining amount (up to 60%) can be withdrawn as a tax-free lump sum.
Types of Annuity Plans Available Under NPS
- Life Annuity: Fixed monthly pension till the subscriber's death.
- Joint Life Annuity: Pension continues for spouse after the subscriber's death.
- With Return of Purchase Price: On death, the annuity amount invested is returned to nominee.
NPS Maturity Example: Sample Retirement Corpus & Pension
| Monthly Contribution | Starting Age | Corpus at 60 | Lump Sum | Monthly Pension |
|---|---|---|---|---|
| ₹5,000 | 30 | ₹1.1 Cr | ₹66.6 Lakhs | ₹22,000 |
Benefits of Using the NPS Calculator for Retirement Planning
- Retirement Planning: Estimate your retirement wealth and monthly pension.
- Visual Insight: See how your contributions grow year over year.
- Corpus Breakdown: Understand lump sum vs annuity portion and monthly pension based on returns.
- Flexible Inputs: Try different contribution, return, and annuity scenarios.
Important Things to Consider Before Investing in NPS
- Minimum 40% annuity is mandatory at age 60 (unless corpus is below ₹5 lakh).
- Pension depends on annuity rate: It’s generally lower than NPS growth returns.
- Choose annuity provider wisely: Plans differ in features and monthly payouts.
- Tax: Lump sum is tax-free; annuity income is taxable.
NPS is a powerful long-term investment tool for retirement, especially when combined with tax benefits and disciplined savings. Understanding how annuity and corpus work helps you optimize your retirement planning.
Explore more: Home Loan EMI Calculator, SIP Calculator, Simple Interest Calculator, Compound Interest Calculator