The National Pension Scheme is a popular investment option that lets investors accumulate funds for their retirement. However, like any other investment scheme, the NPS plan also involves risk due to its market connection. Based on the account holder’s investment goals, risk appetite, and investment horizon, they can build a secure retirement with relevant NPS contribution and calculation strategies.  

Here’s an outlook on how NPS is calculated and the best NPS contribution and calculation strategies. 

Choosing the Right Type of NPS Account 

Based on your investment goals and desired flexibility, you must choose the right type of NPS account that aligns with your objectives. There are two types of NPS accounts: 

  • Tier 1 NPS Account: The primary type of NPS account has restrictions on contributions and withdrawals. Contributions to a Tier 1 account qualify for tax deductions under Section 80C of the Income Tax Act. So, those looking for tax benefits must contribute to a Tier 1 NPS account.  

  • Tier 2 NPS Account: Tier 2 is an optional NPS investment account with more flexibility in terms of contributions and withdrawals. However, contributions to it are not eligible for tax deductions. Therefore, those looking for more flexibility with compromise on the tax benefits must consider opening a Tier 2 NPS account. 

Using a Safe and Convenient Medium to Make NPS Contributions 

Investors can make NPS contributions through various online and offline modes. One must choose a mode according to their convenience and preference. These are the most common options: 

  • Visiting a nearby POP-SP or an authorised bank branch such as Kotak Mahindra Bank, filling out an NPS contribution form, and submitting it to the bank or POP representative with the contribution amount.  

  • Visiting a PFRDA-approved nodal office, filling out the contribution form, and making the payment. 

  • Visiting the website of the preferred CRA (Central Record-Keeping Agency), opening an account, receiving PRAN and password, and making the contribution.  

  • Visiting the ePNS portal, logging in using the PRAN and password, providing more details, entering the captcha, choosing the account type, specifying the contribution amount, and proceeding with the payment.  

  • Downloading the NSDL e-Gov app, logging in using the PRAN and password, and following the on-screen instructions to contribute. 

Considering the Minimum NPS Contributions 

Although NPS has no upper contribution limits, here is an outline of the minimum NPS contributions: 

For a Tier 1 NPS Account:  

  • Minimum contribution when opening the account: Rs. 500 

  • Minimum contribution amount in a year: Rs. 1,000 

  • Minimum amount per contribution: Rs. 500 

  • Minimum number of contributions in a year: 1 

For a Tier 2 NPS Account:  

  • Minimum contribution when opening the account: Rs. 1,000 

  • Minimum contribution amount in a year: Nil 

  • Minimum amount per contribution: Rs. 250 

  • Minimum number of contributions in a year: Nil 

One must keep these limitations in mind when contributing to an NPS account. 

Using an NPS Calculator  

An NPS calculator is an online tool that estimates the retirement corpus when the account holder turns 60. However, it provides only estimates, as the actual returns are market-linked and may vary at maturity. Moreover, subscribers cannot withdraw the entire corpus at retirement. They can only withdraw 60% of the wealth and invest the remaining 40% in an annuity. An NPS calculator estimates the corpus amount while considering this rule, letting the investor plan the contributions accordingly.  

The NPS calculator calculates the future corpus based on the following parameters: 

  • Subscriber’s Age: The earlier an individual starts contributing to NPS, the bigger the corpus they can build for retirement. One must enter their current and retirement age to calculate the investment horizon into the scheme automatically.  

  • Monthly Investment Amount: Based on the calculator results, the investor can decide upon the contribution amount they must make each month to build the desired corpus. 

  • Expected Return on Investment: The NPS investment amount is market-linked, which means the tool cannot provide accurate estimates with certainty. However, it may generate results based on the investor’s expected return on investment.  

  • Expected Annuity Rate: Under the current NPS rules, investors must purchase an annuity with at least 40% of their accumulated corpus at retirement. The annuity provides pension income to the investors. Therefore, investors must enter the expected annuity rate when using an NPS calculator. 

After understanding how NPS is calculated using an NPS calculator, one must use the above strategies to make informed decisions and contribute adequately. Open an NPS account online today to build a sufficient corpus for retirement.