A Guide to Using a NPS Calculator for Retirement Planning

Planning for retirement can seem daunting, especially when you are unsure how much you’ll need or how much to save. Fortunately, schemes like the National Pension System (NPS) calculator make it easier to plan effectively. The NPS is a government-backed retirement scheme in India designed to help individuals build a retirement corpus over time. 

Using an NPS calculator can provide you with detailed insights into your future savings, estimated pension, and tax benefits. In this blog, we will explore a step-by-step guide to using the NPS calculator for retirement planning and the tax benefits it offers.

Step-by-Step Guide to Using an NPS Calculator 

The NPS calculator is a simple yet powerful tool that helps you estimate your retirement savings based on certain inputs. It gives you an idea of the final corpus you’ll accumulate, the pension you’ll receive, and your maturity amount. Let’s walk through the steps to use an NPS calculator efficiently:

Step 1: Enter Your Age

The first step in using the NPS calculator is entering your current age. This helps the calculator estimate how many years you have left to contribute to your NPS account. For example, if you’re 30 years old and you plan to retire at 60, you have 30 years to build your retirement fund. The earlier in your life you start, the more time your money has to grow.

Step 2: Select Your Retirement Age

Next, you need to choose your intended retirement age. Most people retire at 60, but the NPS allows you to select a retirement age of up to 70. The age you select will determine the length of time you have to contribute and grow your savings. The retirement age you choose will also affect your pension, as the longer you invest, the greater your savings and returns will be.

Step 3: Input Your Monthly Contribution

Now, you’ll input the amount you plan to contribute to your NPS account every month. This contribution can be as low as ₹500 per month. Your monthly contribution is a critical factor in determining how much you will have at the end of your investment period. The higher your contribution, the bigger your retirement corpus. You can also opt for a yearly contribution if you prefer, and the calculator will allow you to enter this amount accordingly.

Step 4: Expected Rate of Return

The NPS provides market-linked returns, which depend on how the underlying assets (like government securities, equity, and corporate bonds) perform. In this step, you can input an expected rate of return, typically ranging from 8% to 10%. It’s important to remember that the NPS does not guarantee a fixed return, so the actual return might vary depending on market conditions.

Step 5: Years of Investment

Based on your current age and retirement age, the calculator automatically calculates the total number of years you have left to contribute to your NPS account. For example, if you are 35 and plan to retire at 60, you’ll have 25 years of contributions. This factor is important because the longer you invest, the more you benefit from the power of compounding, where your returns generate additional returns over time.

Step 6: Pension and Annuity Options

Upon retiring, the NPS requires you to invest at least 40% of your total savings in an annuity plan, which will provide you with a regular pension. The remaining amount is given as a lump sum. The calculator allows you to select the percentage of your corpus that you want to convert into a pension (up to 60%). Based on your choice, the calculator will provide an estimate of your monthly pension amount.

Step 7: Maturity Amount and Monthly Pension

After inputting all the necessary details, the calculator will display an estimate of your final maturity amount (the total savings accumulated by the time you retire) and your monthly pension. The calculator gives you a clear view of how much you can expect in terms of monthly pension and how much you’ll receive as a lump sum upon retirement.

The NPS calculator is designed to help you experiment with different scenarios. You can adjust your contributions, change the retirement age, or tweak the expected rate of return to see how these changes will impact your final savings and pension.

Customising Your Retirement Plan Using the NPS Calculator 

• Adjusting Contributions

If you wish to increase your retirement savings, you can experiment with higher monthly contributions. For instance, increasing your contribution from Rs.2,000 to Rs.3,000 per month can significantly impact your total corpus over 20 or 30 years. The calculator will show you how much more you will accumulate and how this affects your pension. If you find that your current contribution will not meet your retirement needs, this feature allows you to plan accordingly.

• Changing Retirement Age

The NPS calculator also lets you adjust your retirement age. If you plan to retire early, say at 55 instead of 60, the calculator will show you how this reduces your contribution period and final corpus. On the other hand, if you’re willing to work until 65, you’ll have more years of contributions, resulting in a larger retirement fund and potentially a higher pension.

• Altering the Rate of Return

Although the rate of return is market-linked and varies, you can use the calculator to test different return rates. By increasing or decreasing the expected return, you can see how this affects your savings. This is especially helpful in setting realistic expectations about your investment. The flexibility of the NPS calculator enables you to fine-tune your retirement strategy and adjust your plan based on changing financial circumstances.

NPS Tax Benefits 

1. Employees who contribute to NPS can receive the following tax advantages on their contributions:

• A tax deduction of up to 10% of their earnings (Basic + DA) is allowed under Section 80CCD(1), but this is capped at Rs.1.5 lakh under Section 80CCE.
• A tax deduction of up to Rs.50,000 is also permitted under Section 80CCD(1B), in addition to the overall cap of Rs.1.5 lakh under Section 80CCE.

2. Benefits for Employees from Employer Contributions:

• An employer's contribution to an employee's NPS is eligible for a tax deduction of up to 10% of the employee's salary, which is basic plus DA, or 14% if the contribution is made by the Central Government under Section 80CCD(2) and exceeds the Rs.1.5 lakh limit set by Section 80CCE.

Note: The contribution limit for employers has been increased to 14% from 10% by the Budget 2024, effective from April 1, 2025.

3. Tax Advantages for Self-Employed Individuals

• Self-employed people who put money into their NPS can claim the following tax benefits on their own contributions:
• A tax deduction of up to 20% of their total income is allowed under Section 80CCD(1), but this is limited to Rs.1.5 lakh under Section 80CCE.
• A tax deduction of up to Rs.50,000 is also available under Section 80CCD(1B), in addition to the overall cap of Rs.1.5 lakh under Section 80CCE.

4. Tax Benefits for Partial Withdrawals from NPS Account:

Partial withdrawals from NPS are exempt from taxes when the withdrawn amount is no more than 25% of the self-contribution, as long as the terms and conditions set by PFRDA under section 10(12B) are met.

5. Tax Benefits on Annuity Purchases:

Annuity purchases are exempt from taxes under Section 80CCD(5). However, any income received from an annuity is subject to tax under Section 80CCD(3).

6. Tax Benefits on Lump Sum Withdrawals:

A tax exemption is granted on a lump sum withdrawal of up to 60% of the accumulated NPS funds when the individual reaches 60 years or superannuation.

Conclusion 

The NPS not only helps you build a retirement corpus but also provides substantial tax-saving opportunities, which you can easily explore using the calculator. On the other side, an NPS calculator helps you to estimate your retirement savings, monthly pension, and tax benefits with just a few inputs. 

By allowing you to adjust variables, the calculator gives you control over your financial future. With its simplicity and flexibility, the NPS calculator for retirement planning makes it easier and more accessible, so that you can secure a comfortable and worry-free retirement.

Written by Bruhadeeswaran R.