NPS Interest Rates (NPS)

National Pension Scheme, NPS, is a government retirement scheme. Individuals can keep contributing throughout their working years of life to reap the benefits during their retirement years. The National Pension Scheme is managed by the PFRDA (Pension Fund Regulatory and Development Authority) and the central government. For all those people looking for a simple and secure retirement savings plan, NPS can be a good choice. NPS interest rate is one of the most striking features of why it is so popular.

You must also note that in the recent budget, the government introduced NPS Vatsalya, where parents can open an NPS account on behalf of their minor kids. Parents can keep contributing until their child becomes 18 years old, after which the child takes over the account. The interest rate earned on different types of NPS accounts makes it a lucrative option for many. Read on as we discuss all about NPS interest rates that you must know.

What is the National Pension Scheme (NPS)?

The National Pension Scheme, as discussed above, is a government-backed retirement plan. Individuals can open their NPS account and contribute wilfully until retirement to build a corpus. Being a social security initiative, NPS is open to individuals from the government sector, private sector, and unorganised working sectors as well. Armed forces are, however, not eligible for NPS. The NPS interest rate in 2025 for different NPS accounts was between 9-12%.

Over the years, individuals can build a corpus. Upon retirement, a part of this corpus can be withdrawn. The remainder is provided as a regular monthly pension after retirement. When the scheme was launched, it was limited to central government employees. However, now it is open to everyone except the armed forces. You are also eligible for tax benefits under Section 80C and 80CCD of the Income Tax Act of 1961.

• The minimum and maximum entry age for NPS is 18 and 65 years, respectively

• Individuals can withdraw up to 60% of the corpus upon retirement, and the rest is served as regular monthly income

• There are two types of NPS accounts, Tier 1 and Tier 2

• Parents of minor kids can also open an NPS Vatsalya account on behalf of their kids and manage it until the kids turn 18.

Types of NPS Accounts

The National Pension Scheme has two types of accounts: Tier 1 and Tier 2. Anyone subscribing for NPS has to begin with opening a Tier 1 account. So, it is the default account. The Tier 2 account, however, is voluntary, and one may or may not choose to have a Tier 2 account. So, in order to open a Tier 2 account, one must already have a Tier 1 account. The table below will give you a quick insight into the two types of NPS accounts:

How NPS Interest Rates Are Calculated?

The interest rate on an NPS account is calculated annually. So, the total amount invested receives the compound interest on the entire principal amount and the interest earned on it. Hence, the final retirement corpus becomes a much larger amount. Here is an illustration to help you understand how the interest rate is calculated on an NPS Tier 1 account:

Riteish, a 21-year-old private sector employee, started his NPS Tier 1 investment with ₹3,600 every month. So, Riteish kept investing for 39 years until his retirement at the age of 60.

Let's anticipate that the annual return on investment is at 8%. Upon retirement, Riteish also invests 40% of the corpus towards annuity and withdraws 60% of the corpus.

So, the total investment by Riteish is ₹16,41,600 while the total corpus built is ₹1,07,06,420. Out of this, Riteish withdraws ₹64,23,852 and invests the remaining 40% towards an annuity. The annuity investment yields a regular monthly income of ₹21,413.

So, you can see in the illustration above that with a small investment of ₹3,600 monthly, Riteish was able to build a huge corpus and get a monthly income of ₹21,413. So, the idea is to choose the funds correctly and stay invested for a long and continuously.

Factors Affecting NPS Interest Rates

The NPS interest rate is not a fixed factor. It may fluctuate depending on the performance of the funds, government announcements, inflation, etc. So, there are multiple factors that drive the interest rate on NPS. Understanding these helps you get clarity on the returns that you may expect from your NPS investment. Factors that affect NPS interest rates are:

• Performance of Funds

A part of the NPS corpus is invested in securities and bonds. So, the performance of the assets and funds has a decisive role in NPS returns. Each of the securities, like government or corporate bonds, equities, etc., vary in performance, and so do their returns. Usually, government bonds are more stable than equities.

• Performance of PFM

There are various Pension Fund Managers who manage your NPS investment and assets. Their performance may also impact the overall performance of your funds. So, choosing a fund house carefully is crucial. There are multiple PFM to choose from. In case you are unsatisfied with the performance of your fund house, you need to compromise. You may switch to the pension fund manager if you want.

• Choice of Assets

Different assets have different reactions to market fluctuations and conditions. So, choosing the right asset also becomes crucial. You must take into account your financial goals, risk appetite, investment horizon, etc. before choosing the NPS investment assets. Usually, equity funds are more volatile in comparison to government bonds. You may get help from a professional to help you choose the right funds according to your risk appetite and financial goals.

• Economic Conditions

The performance of assets where NPS funds are invested is subject to market risks. So, both national and international economic conditions have an impact on the NPS returns. Changes in economic conditions globally or even within the country can affect the returns. Government announcements, RBI rules, etc., may impact the performance of the assets and, thus, returns on NPS. Any international financial crisis or boom can also impact the returns.

• Investment Habits

NPS investment yields high returns when you stay invested for longer. Since the investment is voluntary, you must avoid skipping installments to ensure a continuous investment habit. The longer you invest in NPS, the higher the returns. So, your investment habit also decides the overall returns that you are eligible for.

Tax Benefits Under NPS

The National Pension Scheme offers lucrative tax benefits to the subscribers. There are broadly three types of contributors in an NPS account and the tax benefit is served accordingly. Tax benefit also depends on the type of withdrawal of the NPS balance. So, here are the details:¹

• Self-contribution by Employees

Employees who contribute on their own are eligible for 10% tax deductions of their pay under Section 80CCD(1) and a maximum limit of up to ₹1.5 lakhs under Section 80CCE of the Income Tax Act of 1961.

Individuals can also claim tax deductions of up to ₹50,000 under Section 80CCD(1B) with a limit of ₹1.5 lakh under Section 80CCE of the Income Tax Act of 1961.

• Contribution by Employer

Employers who contribute on behalf of their employees are also eligible for tax benefits. They can claim tax deductions of 10% of their pay or 14% of their salary (applicable only to central government employees) under Section 80CCD(2). This is beyond the ₹1.5 lakh limit under Section 80CCE of the Income Tax Act of 1961.

• Contribution by Self-employed People

Self-employed NPS subscribers can claim a 20% tax deduction on gross income under Section 80CCD(1). This deduction is limited to ₹1.5 lakhs under Section 80CCE. Along with this, they can also claim up to ₹50,000 deductions under Section 80CCD(1B), which is also limited to ₹1.5 lakhs under Section 80CCE of the Income Tax Act of 1961.

• NPS Withdrawal Tax Benefits

PFRDA has specified the special conditions under Section 10(12B) based on which an individual can partially withdraw the NPS balance before maturity. In such a case where the individual has withdrawn 25% of the NPS balance, they are still eligible for tax benefits. These are:

• The annuity purchase or superannuation (at the age of 60 years) is exempted from tax. However, the returns generated by annuity investment are subject to taxation under 80CCD(3).

• The NPS withdrawal upon superannuation up to 60% of the NPS balance remains tax-free under Section 10 of the Income Tax Act of 1961.

How Asset Allocation Works Under NPS?

Asset allocation under NPS is an essential step. It determines the overall returns in an account. So, it is crucial to choose the asset carefully and mindfully. Here are the four types of asset allocation under NPS:

People can allocate assets actively by choosing assets on their own. If not this way, individuals may also auto-select assets where the assets are allocated automatically based on the age, risk appetite, and financial goals of an individual.

Who Should Opt for NPS?

Anyone who is planning a retirement income can start investing in the National Pension Scheme. Apart from the armed forces, people from government, private, and even unorganized sectors are eligible for NPS subscriptions. A systematic retirement investment plan like NPS is quite suitable for many people, especially those in the private and unorganised sectors.

However, before you invest in it, there are a few factors that you must analyse for a more informed decision. These include:

• Investment Horizon

Plan your investment horizon according to your current age. It helps you decide the exact tenure until which you need to keep investing. NPS investment can be done until the retirement age of 60 years. So, the earlier you start, the longer you can stay invested.

• Withdrawal Rules

Make sure to learn about the withdrawal rules of NPS to avoid premature withdrawal. There are three types of NPS withdrawals:

• Upon superannuation, which is, after reaching the age of 60. During this retirement age, 60% of the corpus can be withdrawn while 40% has to be invested in an annuity. However, if the amount is less than ₹5 lakhs, 100% amount can be withdrawn.

• During premature exit (before 60 years of age), one has to invest 80% of the corpus in annuity if the amount is greater than ₹2.5 lakhs

• Upon the death of the subscriber, 100% of the amount can be withdrawn.

• Financial Plans

NPS investment benefits are available for use after retirement. So, assess your financial plans so you can decide on a practical investment amount accordingly. Continuous investment can yield high returns. Up to 60% of the balance can be withdrawn, which can help you with various retirement financial goals, while the remaining 40% provides you with regular monthly income.

• Risk Appetite

Last but not least, make sure to assess your risk appetite. It helps you choose the asset carefully. While some assets, like equity funds,, are more volatile, government bonds are more stable. The ones that are more volatile also have the potential for higher returns.

Final Takeaway

The National Pension Scheme is one of the most popular government-backed schemes in India. Being a voluntary retirement scheme, individuals can willfully plan their retirement income. The attractive NPS interest rate is yet another factor that influences people towards this scheme. Compared to various other investments, NPS offers stable returns and low-risk exposure. All you have to do is keep investing until retirement and then start receiving regular monthly income.

NPS not only helps you create a retirement income but also builds a retirement corpus that can be utilised for various purposes. If you are also planning for an NPS account, now is the right time. Start planning a financially sound retirement today!

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