The National Pension System (NPS) is a government-backed pension scheme regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). It allows you to contribute regularly to a pension account during your working years and provides a lump sum or monthly pension after retirement. This scheme also provides tax deductions of up to ₹ 2 lakhs and an average NPS interest rate of 9%—12% p.a. in 2024. NPS is an attractive long-term investment option that gives you a secure and comfortable retirement.
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The National Pension Scheme (NPS) is a government-backed long-term retirement plan introduced in India in 2004. This best investment option aims to provide you with a regular income post-retirement through market-linked investments.
The Pension Fund Regulatory and Development Authority of India (PFRDA) regulates this voluntary pension fund. The contributed amount to your NPS Account is invested in market-linked securities. The objective is to create long-term investment returns that are compounded annually. Any Indian citizen between the age group of 18-70 years can subscribe to the scheme.
The returns from the NPS interest rates depend on the contribution made towards the National Pension Scheme and the asset classes chosen. The returns generated on NPS investment are market-linked, as the money is invested in equities and debt securities. The interest is calculated based on your chosen asset classes and the contribution amount.
The following tables illustrate the individual NPS Tier 1 and NPS Tier 2 interest rate returns:
| Classes of Assets | Returns of 1 year (in %) | Returns of 5 years | Returns of 10 years |
| Corporate Bonds (Class C) | 8.41% - 8.96% | 7.08% - 7.87% | 8.49% - 9.09% |
| Equity (Class E) | 29.76% - 39.38% | 19.37% - 21.53% | 13.06% - 14.33% |
| Alternative Assets (Class A) | 6.89% - 13.39% | 6.23% - 9.47% | - |
| Government Bonds (Class G) | 10.83% - 11.31% | 7.45% - 7.75% | 8.97% - 9.74% |
*Last updated as of September 11, 2024.
| Classes of Assets | Returns of 1 year (in %) | Returns of 5 years (in %) | Returns of 10 years (in %) |
| Corporate Bonds (Class C) | 8.38% - 9.86% | 7.18% - 7.94% | 8.49% - 8.88% |
| Equity (Class E) | 29.86% - 37.94% | 20.04% - 21.19% | 12.83% - 14.41% |
| Government Bonds (Class G) | 9.91% - 11.30% | 7.37% - 7.68% | 8.99% - 9.79% |
*Last updated as of September 11, 2024.
Currently, the average NPS interest rate for the last 10 years ranges between 9%-12% p.a.
As compared to other investment options available in the market, NPS offers a profitable return and provides an opportunity to accumulate wealth in the long term.
The higher you contribute towards the scheme, the higher the retirement corpus you can create over a specific tenure.
Moreover, the advantage of compounding makes NPS a lucrative option for retirement planning.
The National Pension System (NPS) offers two types of accounts:
Mandatory for NPS subscribers.
Lock-in period until retirement (age 60).
Offers tax benefits under Section 80C and Section 80CCD(1B).
Withdrawals are restricted: partial withdrawal is allowed for specific purposes like education, medical needs, etc.
Upon retirement, a portion can be withdrawn as a lump sum, while the rest is used to purchase an annuity.
Optional and flexible.
No lock-in period; you can withdraw anytime.
No tax benefits for regular investors.
It works like a savings account, allowing easy withdrawal of funds.
Both accounts help you build a retirement corpus, with Tier I being the main pension account.
The National Pension System (NPS) offers different types of asset allocations that impact the interest rates you earn. These are the primary asset classes:
| Asset Class | Description | Risk Level | Ideal for |
| Equity (E) | Invests in stocks of companies | High-risk, high-reward | Younger investors seeking growth |
| Corporate Bonds (C) | Invests in bonds issued by companies | Moderate risk | Investors looking for a balance of risk/returns |
| Government Bonds (G) | Invests in government securities | Low-risk, stable returns | Conservative investors prioritise safety |
| Alternative Investment (A) | Invests in alternative assets like real estate, private equity | Limited, diversified risk | Investors seeking diversification |
Two types of asset allocation options are available under the National Pension Scheme:
Active Choice: You decide the allocation between asset classes.
Auto Choice: Allocation is done based on your age.
Active Choice option allows you to allocate your funds across various asset classes.
However, equity (Asset Class E) investment is capped at 75% until the age of 50.
After 51, the equity limit reduces gradually according to a set schedule, as shown in the table below.
| Age | Maximum Allocation to Equity |
| 60 years | 50% |
| 59 years | 52.5% |
| 58 years | 55% |
| 57 years | 57.5% |
| 56 years | 60% |
| 55 years | 62.5% |
| 54 years | 65% |
| 53 years | 67.5% |
| 52 years | 70% |
| 51 years | 72.5% |
Individuals can allocate up to 5% of their total funds to Alternative Investment Funds (AIFs), with no restrictions on other asset classes.
For higher returns, a larger equity allocation is ideal, but it's important to balance this with personal risk tolerance.
In auto choice, the allocation depends on the lifecycle fund chosen. There are three types, each varying in risk:
Aggressive
Moderate
Conservative
Each fund has a different asset allocation to match its risk level.
As the investor ages, the risk level decreases in all three funds.
For those seeking higher returns, the aggressive lifecycle fund allocates as follows:
| Age | Equity (E) | Govt. Bonds (G) | Corporate Bonds (C) |
| Up to 35 years | 75% | 15% | 10% |
| 40 years | 55% | 30% | 15% |
| 45 years | 35% | 45% | 20% |
| 50 years | 20% | 60% | 20% |
| 55 years | 15% | 75% | 10% |
The moderate lifecycle fund allocation is as follows:
| Age | Equity (E) | Govt. Bonds (G) | Corporate Bonds (C) |
| Up to 35 years | 50% | 20% | 30% |
| 40 years | 40% | 35% | 25% |
| 45 years | 30% | 50% | 20% |
| 50 years | 20% | 65% | 15% |
| 55 years | 10% | 80% | 10% |
Individuals with a low-risk appetite might prefer the conservative lifecycle fund. The asset allocation for this is provided in the table below.
| Age | Equity (E) | Govt. Bonds (G) | Corporate Bonds (C) |
| Up to 35 years | 25% | 30% | 45% |
| 40 years | 20% | 45% | 35% |
| 45 years | 15% | 60% | 25% |
| 50 years | 10% | 75% | 15% |
| 55 years | 5% | 90% | 5% |
IMPORTANT NOTES:
The auto choice option does not allow you to invest in Asset Class A (Alternative Investments).
The NPS interest rate depends on the chosen investment option and fund type.
Additionally, the fund manager also impacts returns. Different fund managers offer varying returns, and individuals can switch between fund managers and choose different ones for their Tier-I and Tier-II accounts.
You can switch your investment choices twice a year for both Tier-I and Tier-II accounts.
It is important to monitor your fund’s performance and adjust it to match your investment goals.
NPS returns are influenced by the performance of the underlying market-linked NPS fund, which is then compounded monthly. This makes the NPS interest rate calculation a complex process. Therefore, it is advisable to utilize an online NPS calculator. Simply input your age, monthly investment, expected return on investment, and expected return from pension to estimate the returns from your NPS contributions.
Richa, aged 32, plans to invest in the NPS Scheme and retire at the age of 60 years. She invests in this scheme as per the following details:
Monthly Investment = ₹5,000
Estimated NPS Rate of Interest = 10%
She enters these details in the NPS Calculator. The following are the results shown:
Total investment: ₹16.8L
Interest Earned: ₹74.7L
Maturity Amount: ₹91.52L
Your Monthly Pension: ₹30,764
Minimum 40% Annuity Investment: ₹36,61,189
NOTE: According to NPS regulations, 40% of the accumulated corpus should be utilized to procure an best annuity plan when you turn 60.
NPS follows a taxation policy often referred to as Exempt-Exempt-Taxed (EET). Let us have a look at the tax benefits offered by the NPS interest rate 2024:
Exempt on Contribution: You get tax deductions on the amount you contribute towards NPS. This deduction is under Section 80CCD(1) and 80CCD(1B) of the Income Tax Act.
Exempt on Growth: The returns generated on your NPS investment are not taxed during the accumulation phase.
Taxed on Withdrawal: Here's where things get a bit more nuanced. At maturity, you have two options for withdrawing your NPS corpus:
Annuity Purchase (Minimum 40%): A minimum of 40% of the corpus needs to be used to purchase an annuity plan. This annuity provides you with a regular income stream post-retirement. The income received from this annuity will be taxed as per your old vs. new income tax slab.
Lump Sum Withdrawal (Up to 60%): You can withdraw up to 60% of the corpus as a lump sum. However, there's a catch:
Exempt: A specific portion of this lump sum withdrawal (up to a certain limit) is tax-free. This limit is subject to change, but currently, it stands at 60% of the total corpus.
Taxable: The remaining 40% (of the lump sum withdrawal) is taxable.
Under the National Pension System (NPS) scheme, there are eleven Pension Fund Managers (PFMs) you can choose from:
HDFC Pension Management Company Ltd.
ICICI Prudential Pension Fund Management Company Ltd.
Kotak Mahindra Pension Fund Ltd.
LIC Pension Fund Ltd.
SBI Pension Funds Pvt. Ltd.
UTI Retirement Solutions Ltd.
Aditya Birla Sun Life Pension Management Ltd.
Tata Pension Management Private Limited
Max Life Pension Fund Management Ltd
Axis Pension Fund Management Ltd
DSP Pension Fund Managers Private Limited
The table mentioned below illustrates the NPS interest rates 2024- 2025 of top-performing equity pension fund managers of Tier- 1 Accounts, sorted as per 5 - year returns:
| Pension Fund Managers | 1- Year Returns (%) | 3- Year Returns (%) | 5- Year Returns (%) |
| HDFC Pension Fund | 33.10% | 16.10% | 21.15% |
| Kotak Mahindra Pension Fund | 33.62% | 17.37% | 20.94% |
| ICICI Pension Fund | 34.38% | 17.19% | 20.92% |
| UTI Retirement Solutions | 39.61% | 17.81% | 20.50% |
| Aditya Birla Pension Fund | 32.70% | 16.46% | 20.09% |
| LIC Pension Fund | 31.29% | 16.34% | 19.91% |
| SBI Pension Fund | 30.03% | 15.64% | 19.10% |
*Last updated as of September 11, 2024.
The below-mentioned table illustrates the interest rates of NPS Tier 2 top-performing equity pension fund managers in 2024-2025, which are sorted as per 5-year returns:
| Pension Fund Managers | 1-Year Returns (%) | 3-Year Returns (%) | 5-Year Returns (%) | |
| HDFC Pension Fund | 33.14% | 16.15% | 20.50% | |
| UTI Retirement Solutions | 34.99% | 16.47% | 20.46% | |
| ICICI Pension Fund | 33.14% | 17.04% | 20.88% | |
| LIC Pension Fund | 30.41% | 16.02% | 19.89% | |
| Kotak Mahindra Pension Fund | 33.57% | 17.39% | 20.74% | |
| SBI Pension Fund | 30.18% | 15.84% | 19.24% | |
| Aditya Birla Pension Fund | 33.42% | 16.86% | 20.14% |
*Last updated as of September 11, 2024.
Based on the market trends from the past year, NPS scheme interest rate returns range between 9-12% p.a., outperforming PPF, which yielded returns of 7.10% p.a. in 2024. Overall, NPS holds a competitive advantage as a market-linked pension scheme with higher returns.
| Investment Fund Type | Annual Interest Rates (In %) |
| National Pension Scheme (NPS) | 9 - 12% p.a. |
| Public Provident Fund (PPF) | 7.10% p.a. |
| Pension Plans | 9 - 15% p.a. |
Equity Market Performance: The returns depend on how the stock market performs, especially for the equity portion of your investment.
Debt Market Trends: Fluctuations in interest rates and bond yields impact the returns on the debt component of the NPS portfolio.
Asset Allocation: The mix between equity, government bonds, and corporate debt influences overall returns.
Fund Manager Expertise: The skills and strategies of the fund manager play a key role in maximizing returns.
Contribution Amount: Higher contributions over time lead to larger investments, which can increase returns through compounding.
Investment Tenure: The longer you stay invested, the more time your money has to grow, benefiting from market cycles.
Economic Factors: Inflation, interest rates, and overall economic conditions impact NPS returns.
Government Regulations: Changes in policies or investment limits set by the government may affect returns.
The National Pension System (NPS) is the best pension plan in India. It is a government-backed initiative for securing financial stability in retirement. With its attractive features, such as tax benefits and a competitive NPS interest rate in 2024 of 9%-12% p.a., NPS presents itself as a compelling long-term investment option. By providing a systematic and efficient way for individuals to build a retirement corpus, NPS contributes significantly to financial planning and security.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
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