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National Pension Scheme NPS is one of the retirement investment options for Indian citizens launched under the Government’s purview. It’s a voluntary scheme that serves the dual purpose of pension and investment. The NPS interest rate is market-linked.

NPS subscribers can make periodic contributions to NPS and receive a portion of their corpus at retirement in a lump sum while the rest is used to buy an annuity. NPS interest rate is market-linked as they invest in asset classes like equities and debt. Investment towards NPS qualifies for tax savings under Section 80C and Section 80CCD of the Income Tax Act. 

NPS interest rate 2024

Interest or return from the NPS scheme depends on the contributions made and asset classes chosen. The return is market-linked as NPS invests in asset classes like equities and debt. Historically, NPS has earned 9.00% to 12.00% p.a., depending on the schemes chosen. However, there is no fixed rate of return (NPS interest rate) established. When compared to other fixed-income savings schemes, NPS has performed comparatively well in the market. Since the investment made and the scheme differ, the interest in NPS schemes hasn’t been set as a definite amount.
The higher the contributions made, the higher will be the retirement corpus. And the power of monthly compounding will make NPS an attractive retirement financial plan. The NPS interest is entirely tax-free.

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What is NPS Scheme?

The National Pension Scheme (NPS) is a pension and investment scheme. It is a voluntary long-term investment plan for retirement available to Citizens of India. The Pension Fund Regulatory and Development Authority (PFRDA) and Central Government regulate the NPS. All the assets under NPS are owned by a trust established by PFRDA. It is the National Pension System Trust (NPST).

NPS invests the contributions made by individuals into various market-linked instruments such as debt and equities. Therefore, the pension amounts and the performance of these asset classes are linked. Amount invested in NPS has a lock-in period until retirement. Historically,  NPS rate interest has been 9% to 12% returns on the contributions made.

Employees from different sectors (public, private and unorganized (except for armed forces)) can invest in the NPS scheme. During the employment years, people can regularly invest in the scheme. Post-retirement, 60% can be withdrawn in lumpsum while the rest can be received as monthly pensions. Most noteworthy of all its features, NPS offers tax benefits of INR 2 lakh under Section 80C and Section 80CCD.

Additionally, premature withdrawal can be made from NPS. Partial withdrawal up to 25% can be made only after three years of account opening. Also, withdrawal is allowed only for specific purposes like children’s education, serious illness, or for buying a home.

What are the different classes of NPS schemes?

The NPS investor can choose the Pension Fund Manager (PFM), investment choice, and asset classes.

The investor has to choose from the available PFMs. Following are the available PFMs:

  • Birla Sunlife Pension Management Limited
  • Reliance Capital Pension Fund Limited
  • UTI Retirement Solutions Limited
  • ICICI Prudential Pension Funds Management Company Limited
  • LIC Pension Fund Limited
  • HDFC Pension Management Company Limited
  • SBI Pension Funds Private Limited
  • Kotak Mahindra Pension Fund Limited

The investment choices available to the investor are active and auto.

  • Active: Under the active investment choice, the investor can choose how his/her funds are invested, based on personal preference.
  • Auto: Under auto investment choice, the investor need not choose the asset classes and asset allocation. Instead, there is a pre-defined portfolio that changes as per the age of the investor.

Under both the investment choices, the asset classes will be the same. The allocation of all the asset classes must equal 100%. The asset classes have been mentioned below.

The National Pension Scheme has four asset classes:

  • Asset Class E: This asset class belongs to equity market instruments.
  • Asset Class C: All Bonds issued by Public Financial Institutions (PFIs), Public Sector Undertakings (PSUs), Money Market Instruments, and Infrastructure Companies fall under this asset class.
  • Asset Class G: Central Government and State Governments securities and Money Market Instruments (of the government)  fall under this asset class.
  • Asset Class A: Commercial Mortgage-Backed Securities (CMBS), Real Estate Investment Trusts (REITs), Alternative Investment Funds (AIFs), etc. form a part of this asset class.

What are the investment choices in NPS?

The investment choices under the National Pension Scheme (NPS) are Active Choice and Auto Choice.

Active Choice: Individual Funds

In the active choice of investment,  the investor or NPS subscriber can actively decide the allocation of their investment. In other words, based on personal preferences, the allocation of the contribution can be decided. One is required to provide the asset class and its allocation (in percentage) to the Pension Fund Manager (PFM).

Auto Choice: Lifecycle Fund

In the auto choice of investment, the investment is made in a lifecycle fund. It means that a pre-defined portfolio determines the proportion of the funds across the asset classes. Usually, this is based on the age of the investor. Therefore, investors who seek to reduce the risk exposure in their investment with age can opt for Auto Choice. With age, equity, and corporate debt exposure are reduced. Also, under this choice of investment, the investors do not require any knowledge about managing NPS investments.

In this choice of investment, there are three options that are based on the subscriber’s willingness and understanding of risk. These are Aggressive Life Cycle Fund, Moderate Life Cycle Fund, and Conservative Life Cycle Fund

How is asset allocation done in NPS Scheme?

The asset allocation across Asset Class E,C, G, and A is based on the choice of investment of NPS.

Active Choice of investment

The subscriber can select multiple asset classes under a single Pension Fund Manager (PFM).

  • Till the age of 50 years, the maximum Equity Investment allowed is 75% of the total asset allocation.
  • From the age of 51 years and above, the maximum Equity Investment is according to the equity allocation matrix mentioned below.
  • The total investment in Alternative Investment Funds (AIFs) cannot exceed 5%.
  • Total allocation across E, C, G, and A asset classes must be equal to 100%.
Age (Years)Maximum Equity Allocation
Up to 5075.00%
60 and above50.00%

Auto Choice of investment

Aggressive Life Cycle Fund

The aggressive life cycle fund has a cap of 75% of total assets in Equity. The equity exposure starts reducing from 75% when the NPS subscriber is 35 years of age.

Age (Years)ECG
Up to 3575%10%15%
55 and above15%10%75%

Moderate Life Cycle Fund

The moderate life cycle fund has a cap of 50% of total assets in Equity. The equity exposure starts reducing from 50% when the NPS subscriber is 35 years of age.

Age (Years)ECG
Up to 3550%30%20%
55 and above10%10%80%

Conservative Life Cycle Fund

The conservative life cycle fund has a cap of 25% of total assets in Equity. The equity exposure starts reducing from 25% when the NPS subscriber is 35 years of age.

Age (Years)ECG
Up to 3525%45%30%
55 and above5%5%90%

What are the types of NPS scheme?

There are two types of NPS Accounts.

Tier I Account (Default Account)

The Tier I Account is a non-withdrawal permanent retirement account. Upon opening the NPS Tier 1 Account, the subscriber is allotted a Permanent Retirement Number (PRAN). This is a unique identification number for the NPS account.

The minimum investment is INR 500, and after that, INR 1,000 or more every year. At the time of withdrawal, few withdrawal rules apply to the Tier I account. It allows only 60% of the corpus to be withdrawn at the time of maturity, i.e., at 60 years of age. 60% of the corpus is tax-free. The remaining 40% needs to be used to purchase annuity only from any annuity service provider. This is to ensure that it provides regular pension to the subscriber.

The account has two distinct phases, accumulation phase, and distribution phase. In the accumulation phase, regular contributions are made to the account. While in the distribution phase, the pension is received from the accumulated amount.

Additionally, this account qualifies for tax deduction up to INR 1.5 Lakh under Section 80C of the Income Tax Act. Furthermore, it also qualifies under Section 80 CCD up to INR 50,000. It falls under the Exempt-Exempt-Tax (E-E-T) regime. This means the contributions and gains are exempt from tax. However, the entire corpus on withdrawal is liable to tax.

Tier II Account (Voluntary Account)

The Tier II account is a voluntary retirement cum savings account. The account can be opened only if one has a Tier I account. A Tier II account offers more flexibility when compared to a Tier I account in terms of deposits and withdrawals. There are no withdrawal rules for Tier II accounts. 

The minimum investment is INR 1,000. However, it’s not compulsory to invest every year like the Tier I account and also maintain a zero balance account. Therefore, investors can invest or withdraw funds anytime from this account.

Also, the account doesn’t offer any tax deductions for employees of the private sector and self-employed persons. However, for government employees, the amount invested has a three-year lock-in period. The tax benefits can be claimed. 

National pension scheme interest rate calculation

The interest in NPS investment is calculated based on monthly compounding. Let’s understand this better with an example. Ms. Aaradhya is 25 years old and wishes to invest INR 5,000 per month in the NPS scheme. Her expected rate of return (NPS interest rate) is 10%, and she wishes to retire at the age of 60. As per rules, she must use 40% of the corpus to buy an annuity at the age of 60.

The corpus accumulated for Ms. Aaradhya at the age of 60 can be calculated using the Future Value of Annuity (FVA).

For Aaradhya,

P = INR 5,000

r = 10% per annum or 0.83% per month

n = 420 months (35 years until retirement)

FVA = (5,000 * ((1+0.0083)^420) – 1)/0.0083

FVA = INR 1,89,83,190.26

The investment made is INR 21 lakh and the interest earned is INR 1.68 Cr.

Out of the INR 1.89 Cr, 40% is used to buy an annuity, which is INR 75.93 lakhs. The lumpsum amount Ms. Aaradhya will receive at the age of 60 is INR 1.13 Cr. This amount is 60% of the retirement corpus, which is completely tax-free. 40% of the corpus, which is used to buy an annuity, will give Ms. Aaradhya a monthly pension for the period chosen by her.

One can use a SIP calculator to calculate the retirement corpus one can accumulate as in both cases, returns are compounded monthly. Alternatively, one can use a National Pension Scheme Calculator (NPS calculator) to determine the retirement corpus, interest earned, the amount that can be used to buy an annuity, and expected monthly pension from an annuity.

NPS interest rates taxation

Investments towards NPS qualify for income tax savings under Section 80C of the Income Tax Act. Therefore, NPS subscribers can claim income tax benefits for their investment up to INR 1.5 Lakh.

Additionally, investors can claim tax benefits on investments up to INR 50,000 over and above the limit of INR 1.5 lakh under section 80CCD (1b). Also, under section 80CCD (2), an additional limit can be claimed on the contributions from the employer up to 10% of the basic salary of the employee. However, this additional deduction is available only for employees, and there is no upper limit on that.

NPS returns are market-linked. Therefore, the returns are dependent on asset class performance. The returns from NPS investments are entirely tax-exempt.

On maturity of the NPS account, only 60% of the accumulated corpus can be withdrawn. The remaining 40% is required to be invested in an annuity. From FY 2020-21, the Government has revised the taxation of NPS investments. The entire 60% withdrawn upon maturity as a lump sum is entirely tax-free. Earlier, out of 60%, only 40% was tax exempted. The remaining 20% was taxed as per the income tax slab rate of the subscriber.

How does NPS work?

The Pension Fund Regulatory and Development Authority (PFRDA) and Central Government regulate the National Pension Scheme in India. It is one of the retirement investment options for Indian citizens. All the assets under NPS are owned by National Pension System Trust (NPS Trust). PFRDA established NPS trust. 

Once the National Pension Scheme account is opened, a Permanent Retirement Account Number (PRAN) is allotted to the subscriber. An email alert and SMS alert will be sent to the subscriber by the NSDL-CRA (Central Record Keeping Agency) once the PRAN number is generated. The subscriber has to make monthly contributions towards the scheme to create a retirement corpus. 

On retirement, the accumulated corpus is available to the NPS subscriber, provided 40% of it is used for purchasing an annuity from an annuity service provider. The remaining 60% of the corpus from NPS is paid to the subscriber upon retirement in lumpsum. An annuity provides a monthly pension to the investor post-retirement for the period chosen provided the investor pays a lump sum amount at the time of purchase of the annuity. This 60% is entirely tax-free in the hands of the investor. The interest earned is also tax-free.

One can use a SIP calculator to calculate the retirement corpus one can accumulate as in both cases, returns are compounded monthly. Alternatively, one can use a National Pension Scheme Calculator (NPS calculator) to find out the retirement corpus, interest earned, the amount that can be used to buy an annuity, and expected monthly pension from an annuity.

Frequently Asked Questions

What happens to NPS if I die after 60?

Under the National Pension System, if a subscriber reaches the age of 60, then they can withdraw 60% of the amount as a lump sum. While the remaining is used to purchase an annuity. If the investor dies after 60 years, then the annuity payout option depends on the type of annuity taken by the subscriber. Some of the annuity payout options are lifetime annuity, lifetime annuity with return of purchase price, an annuity with joint life, and last survivor benefits.
If a subscriber chooses for return of purchase option, then the original annuity corpus shall be returned to the legal heirs, and the annuity will be stopped.
If a subscriber chooses the joint annuity, then the annuity shall continue in case of the demise of the subscriber, and the amount is paid to the spouse.

What is the annuity rate in NPS?

An annuity in NPS refers to the pension the NPS subscriber receives every month from the Annuity Service Provider (ASP). The annuity rate is the percentage by which the annuity will grow each year. The annuity providers set the rate. The annuity provider guarantees a minimum rate for a time period. The annuity rate varies from one service provider to the other. Therefore, the rates are not standard and depend on multiple factors.
The annuity rates are often in the range of 2% to 8%.

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