National Pension Scheme also is known as NPS is operated by the Pension Fund Regulatory and Development Authority (PFRDA) which is a department of the government of India. For you to take the full advantage of this scheme, you must first understand how it works. After you do that, you will be able to maximize your return that you will receive upon retirement. Let’s start with the basics.
National Pension Scheme –
Features And How To Calculate Interest Rates
- The rate of interest on NPS is dependent upon various factors, therefore it keeps fluctuating.
- The interest rate generally varies between 12% to 14%. This is dependent on the scheme that is chosen by the person into consideration. You can go through the previous records, but they just serve as guidelines and the present interest rate won’t be decided on that.
- There isn’t anything risky in this as this is a government scheme.
- The interest is compounded monthly. Therefore, a large corpus of saving is generated over the years.
- Compared to EPF i.e. Employee Provident Fund scheme, the NPS scheme provides a higher return on investment.
How National Pension Scheme Works
- As I stated in the beginning, the Pension Fund Regulatory and Development Authority (PFRDA) operates a National Pension Scheme.
- You have to make monthly contributions that go into an investment fund.
- There are 7 Pension Fund Managers (PFMs) that are appointed by the PFRDA. Anyone of them you can choose to manage your pension fund.
The following managers manage the funds of government employees:
- LIC Pension Plan
- SBI Pension Plan
- UTI Retirement Solutions
Other people’s funds are managed by either one of the following managers:
- ICICI Prudential Pension
- IDFC Pension
- Kotak Mahindra Pension
- Reliance Capital Pension
- SBI Pension Funds
- UTI Retirement Solutions
You have to choose who of the fund managers will manage your funds and also how you want to invest. There are 2 ways to do that as discussed below.
1] Your Own Choice
While choosing your pension scheme, you can decide your investment portfolio. If you are willing to take the risk, based on how much you can take, you have the option of investing in any of the following and in any proportions.
- Equity or E – A: This is a very risky investment as this money is used for equity market investment. They do have high returns though. Out of the total amount you have, you can invest a maximum of 50% of it here.
- Corporate Debt or C – A: The money here is invested in fixed income bearing agencies/institutions. They have a medium level risk and medium returns.
- Government Securities or G – A: The money invested here has the least amount of risk and also very low returns.
2] Let The Institution Decide
If you don’t want to handle your investments, you can go for this option. This way works in according to your age. When you are young, the money will be invested in high-risk institutions which have high returns. When you get a bit older and start approaching your retirement the money will be invested in the institutions with the least amount of risk involved.
Important Things To Remember
- The managers you choose to handle your funds will charge you approximately 0.0102 % to 0.25% of the investment as their fee.
- Income tax laws keep changing and this very well may affect your tax savings too.
Due to all these factors that directly affect your investments, it becomes very hard to calculate the exact amount that you will get as a pension and also the corpus amount under the National Pension Scheme. However, you can calculate a good estimate of returns by understanding your investment portfolio and predicting how will it work for you.
If you have any questions or suggestions, please leave a comment below.