Q1: What is NPS and how does it work?
NPS (National Pension System) is a government-backed retirement savings scheme in India. You contribute regularly during your working years, and the accumulated corpus is used to provide pension after retirement. It offers tax benefits and market-linked returns.
Q2: How is NPS corpus calculated?
NPS corpus grows through regular contributions and market returns. The formula is similar to SIP: Corpus = P × [((1 + r)^n - 1) / r] × (1 + r), where P is monthly contribution, r is monthly return rate, and n is number of months until retirement.
Q3: What are the tax benefits of NPS?
NPS offers triple tax benefits: (1) Up to ₹1.5 lakh deduction under Section 80C, (2) Additional ₹50,000 deduction under Section 80CCD(1B), (3) Employer contribution up to 10% of salary is tax-free. Total tax benefit can be up to ₹2 lakh per year.
Q4: How much pension will I get from NPS?
At retirement (age 60), you can withdraw up to 60% of corpus tax-free. The remaining 40% must be used to buy an annuity (pension plan). Monthly pension depends on annuity rates (typically 6-7% p.a.) and the annuity corpus amount.
Q5: What is the minimum contribution for NPS?
Minimum contribution is ₹500 per month or ₹6,000 per year. You need to contribute at least once per year to keep the account active. There's no maximum limit, but tax benefits are capped as per income tax rules.
Q6: Can I withdraw money from NPS before retirement?
Partial withdrawal (up to 25% of contributions) is allowed after 3 years for specific purposes like children's education, marriage, medical treatment, or house purchase. Early exit before 60 is allowed but with restrictions and tax implications.
Q7: What returns can I expect from NPS?
NPS returns depend on your fund choice (Equity, Corporate Bonds, Government Securities, or Auto). Historical returns range from 8-12% annually. Equity funds may give higher returns but with more volatility. Returns are market-linked and not guaranteed.
Q8: What happens to my NPS account after retirement?
At age 60, you can withdraw up to 60% of corpus (tax-free). The remaining 40% must be used to purchase an annuity for regular pension. You can defer withdrawal and continue investing until age 70. After 70, you must start withdrawing.
Q9: Is NPS better than PPF or EPF?
NPS offers higher potential returns (market-linked) and better tax benefits, but with market risk. PPF offers guaranteed returns (around 7-8%) and tax-free maturity. EPF is employer-based. NPS is best for those seeking higher returns and willing to take market risk.