How NPS builds a pension
The National Pension System is a market-linked retirement product. You contribute every month until you turn 60; the money is invested across equity and debt funds and compounds over your working life. At 60, the accumulated corpus is split: a lump sum you can take tax-free, and an annuity that converts the rest into a monthly pension for life.
Because contributions are monthly and returns compound monthly, NPS behaves like a long-running SIP with a pension wrapper on top.
The formulas
Corpus at 60 uses the future value of a monthly investment:
Corpus = M × [ (1 + i)ⁿ − 1 ] ÷ i × (1 + i)
where M is the monthly contribution, i is the monthly return (annual ÷ 12 ÷ 100), and n is the number of months until 60.
At retirement the corpus splits into:
- Lump sum = Corpus × (1 − annuity%)
- Annuity corpus = Corpus × annuity%
- Monthly pension ≈ Annuity corpus × annuity-rate ÷ 12
Worked example
A 30-year-old contributes ₹10,000 a month until 60 (30 years = 360 months) at an expected 10% return, choosing to annuitise the minimum 40% at a 6% annuity rate.
- Monthly rate i = 10 ÷ 1200 ≈ 0.008333; n = 360
- Corpus ≈ ₹2.28 crore
- Total invested = 10,000 × 360 = ₹36,00,000 — the rest is growth
- Lump sum (60%) ≈ ₹1.37 crore, annuity corpus (40%) ≈ ₹91 lakh
- Monthly pension ≈ 91,00,000 × 6% ÷ 12 ≈ ₹45,600
The striking number is how little of the corpus is your own money — about ₹36 lakh invested grows to ₹2.28 crore over 30 years, a vivid demonstration of long-horizon compounding.
Points to weigh
- Annuity rates change the pension a lot. A higher annuity rate or a larger annuitised share raises your pension but cuts the lump sum.
- Start early. A decade's head start dramatically increases the final corpus because the early contributions compound the longest.
- Mind the tax on pension. The lump sum is tax-free but the monthly annuity is taxed at your slab — plan retirement income accordingly.
NPS suits disciplined, long-term retirement saving with a useful extra ₹50,000 deduction under 80CCD(1B). Pair it with PPF and EPF for a diversified retirement base.