NPS (Nation Pension Scheme) Interest Rates 2023

Proper retirement planning goes a long way to improving life after retirement. Financial security in your old age can be a lifesaver. With all of the inflation, healthcare and other costs will only go up in the future, and if you do not have a solid retirement plan, things can get complicated in your old age.

Retirement can seem like a long way away for people in their 20s and 30s, who are probably in the beginning stages of their careers. However, starting early makes retirement planning a lot easier. After all, the best time to have started planning for your retirement was yesterday, and the next best time to do it is now. 

You can start by investing in a retirement plan or pension scheme, and there are many of both offered by various financial companies. One such scheme offered by the government of India that you can invest in is the National Pension Scheme or NPS. 

What Is NPS?

NPS stands for National Pension Scheme, a pension scheme offered by the government of India under the Pension Fund Regulatory and Development Authority or PFRDA. It was explicitly introduced to improve old age financial security, and individuals can regularly contribute toward NPS to avail a certain amount of regular income after retirement. 

Additionally, NPS is one of the few retirement schemes with no fixed interest rate. The interest rate in NPS is market-linked and, therefore, fluctuates according to how well the market is doing. Currently, the National Pension Scheme interest rate is between 9-12%, making it one of the more lucrative options for investment to create a financial cushion for retirement. Moreover, NPS also offers the additional benefit of tax savings on investments. 

Some Things To Know About The NPS Scheme

Here are certain things to know about the National Pension Scheme or NPS before you invest in it:

  • The government of India offers the NPS. 
  • NPS subscribers are often between 18 and 65 and are expected to contribute a certain amount to the scheme to make a retirement corpus. 
  • The scheme is differentiated into NPS Tier 1 and NPS Tier 2 accounts.
  • Tier 1 is the primary account, and an individual has to have a Tier 1 account to open a Tier 2 account. 
  • NPS subscribers can claim tax benefits under Section 80CCD (1), with the highest benefit amount available being  1.5 lakhs as per Section 80CCE. 
  • The scheme was launched to improve old age income security and encourage systematic savings among the country's senior citizens. 
  • NPS was launched under the Pension Fund Regulatory and Development Authority and is managed by them. 
  • The NPS scheme interest rate is market-linked and, therefore, not fixed. 
  • Though subject to regulatory restrictions, NPS subscribers can switch their investment choices and fund managers.
  • On retiring, NPS subscribers will receive part of the returns as a lump sum, while the remaining will be used to purchase an annuity that provides a monthly income.

Features And Benefits Of NPS

The National Pension Scheme comes with a lot of features and benefits, including:

  • Easy Application Process: The application process to subscribe to NPS is straightforward and can be done online if preferred. Once you have opened your account, you’ll receive a Permanent Retirement Account Number or PRAN, which can be used to view your account and make transactions.
  • Attractive Interest Rates: The interest rate in NPS fluctuates between 9% and 12% per annum and offers better returns than other small savings schemes such as PPF.
  • Tax Benefits: As an NPS subscriber, you can avail of tax benefits of up to  1.5 lakhs on your investments. Remember, though, that Tier 2 accounts are exempt from these benefits. 
  • Transparency: The NPS scheme is very transparent, and subscribers will know exactly where their money is being invested and what kind of returns they will get. 
  • Portable: Since your PRAN number is unique, it is valid everywhere. So, if you move from one place to another, it will not have to change. 
  • Safe And Secure: All NPS investments and transactions are monitored by the PFRDA and are, therefore, very safe and secure. 
  • Cost Efficient And Cost Effective: Opening and maintaining an NPS account doesn’t cost a lot of money, making it cost-effective. Moreover, you are accumulating more wealth every year until retirement, when you invest in NPS due to the compounding effect. This makes it cost-effective as well.  

Fund Managers Of NPS

The fund managers are the ones who invest the money contributed and managed the returns. Different fund managers boast differing rates of interest in NPS. NPS subscribers have the freedom to choose their preferred fund manager and can even opt for different fund managers for their Tier 1 and Tier 2 accounts. 

The following the fund managers available as of now:

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

What Is NPS Interest Rate?

NPS is a voluntary pension fund monitored by the PFRDA. A person can register with NPS and contribute a minimum of  6000 per year or  500 per month. The individual can pay this amount monthly, quarterly, half-yearly, or even as a lump sum yearly. This contributed money will be further invested in market securities to create regular returns in the long term, which will be compounded annually. 

Additionally, NPS returns depend on the amount invested and the chosen asset classes. The money is usually invested in equity and debt; therefore, the returns received and the NPS interest rate is market-linked.

As mentioned before, the subscriber can choose what asset classes to invest in and the amount to invest as long as it is over  500 per month, and the interest will vary accordingly. Therefore, the higher the amount invested, the higher the retirement corpus built. Additionally, with the power of compounding, the amount continues to grow yearly, making NPS a rather lucrative option for retirement planning.

As of now, the NPS scheme interest rate fluctuates between 9% and 12%, and any citizen of India between the ages of 18 and 60 can subscribe to NPS. The maturity period of the scheme can be extended up to 70 years. After 3 years of initial investment, 25% of the fund can be taken out before maturity in case of specific needs, such as buying a home, treating a critical illness, or sponsoring a child’s education. 

Moreover, NPS allows subscribers to have Tier 1 and Tier 2 accounts. The following table describes the returns for individual Tier 1 and Tier 2 accounts:

  • NPS Tier 1 Returns:

Asset Classes 1 Year Returns (in %) 5 Year Returns 10 Year Returns
Corporate Bonds 12.46 - 14.47% 9.27 - 10.15% 10.05 - 10.64%
Equity 15.33 - 18.81% 13.11 - 15.72% 10.45 - 10.86%
Alternative Assets 3.98 - 16.73% - -
Government Bonds 12.95 - 14.26% 10.29 - 10.88% 9.57 - 10.05%
  • NPS Tier 2 Returns

Asset Classes 1 Year Returns (in %) 5 Year Returns 10 Year Returns
Corporate Bonds 12.71 - 16.36% 9.55 - 10.17% 9.86 - 10.60%
Equity 15.19 - 17.92% 13.05 - 15.83% 10.35 - 10.58%
Government Bonds 12.61 - 13.42% 10.40 - 12% 9.59 - 10.07%

Calculation Of The NPS Interest Rate 

The rate of interest in NPS is calculated based on monthly compounding. For example, a 25-year-old wants to invest  5000 per month for 35 years at an interest rate of 10%. They would generate a corpus of  19,141,384, with the total principal invested being  21,00,000. Suppose they purchase an annuity with 40% of that at an interest rate of 6%; their monthly income after retirement would be  38,283. 

Considering that this calculation is complex, the best way to know how much to invest in getting your desired corpus amount would be to use the online NPS calculator. The calculator will ask you for your expected monthly contributions to NPS, the age of starting the investment, the number of years you expect to continue investing, and the interest rate of the scheme you have decided to invest in. 

This information will calculate the corpus you will receive, the interest you will earn, the amount you can use to purchase an annuity, and the expected monthly pension from the annuity. 

Taxation Of NPS Interest Rate

The investments made to the NPS scheme are exempt from taxation under Section 80C of the Income Tax Act. A subscriber can claim a maximum exemption of up to  1.5 lakhs. However, if the investment amount is over  50,000 per month, it is possible to claim a tax exemption of over  1.5 lakhs under Section 80CCD (1B). Additionally, under Section 80CCD (2), the subscriber can claim an additional limit on the investment. This amount can be up to 10% of the employee's basic salary. Of course, this applies only to employees of other companies and not self-employed people. 

The rules changed a little in the financial year 2020-21, and the entire 60% withdrawal amount on maturity is tax exempted. Before, only 40% of the withdrawal amount had been tax exempted. 

Asset Allocation Under NPS

An important factor in understanding before investing in NPS is how the asset allocation works under it, especially since the asset allocation is what affects the NPS scheme interest rate the most. The asset types available include:

  • Government bonds, also known as Class G
  • Equities, also known as Class E
  • Corporate Bonds, also known as Class C
  • Alternative Assets, also known as Class A, include Real Estate Investment Trusts (REITs), Commercial mortgage-backed securities, and alternative investment funds. 

Now, there are two investment choices in NPS. They include:

  • Active Choice

This choice ensures subscribers can allot their investment across the different available classes. However, until the subscriber reaches 50 years of age, they cannot invest more than 75% of their money in asset Class E equities. Additionally, after 51 years of age, the percentage of money allowed to be invested in asset Class E reduces gradually, as explained in the following table. 

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%

Moreover, asset Class A also restricts investment to a certain extent. Subscribers cannot commit more than 5% of their investment into alternative investment funds. There are no such restrictions with the remaining asset classes. 

Investing more equities (Class E) offers a higher National Pension Scheme interest rate. Remember that while investments in equities offer higher returns, they are also at a higher risk. So, be sure to match your investments with your risk aptitude.

  • Auto Choice

This is the second investment choice available under the NPS. As the name suggests, this doesn’t allow investors to choose their asset classes but only the investment risks they’re willing to take. Thus, the options are aggressive, moderate, or conservative. 

The asset allocations will vary based on risk factors. However, it is to be noted that none of the options under auto choice offers asset Class A under them. Additionally, the risk factor reduces with age in all three options. 

For a risk-averse investor, the best option is the conservative fund. The asset allocation of a conservative fund is as follows:

Age Asset Allocation
Upto 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%

The aggressive portfolio would be the best option for those willing to take big risks. The asset allocation for the aggressive fund is as follows:

Age Asset Allocation
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 fund is the best option for investors willing to take some risks but not too much. The asset allocation for the moderate fund is as follows:

Age Asset Allocation
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%

Thus, for auto choice, the NPS interest rate would be decided based on the type of fund chosen. Additionally, subscribers can alter their investment choices for Tier 1 and Tier 2 accounts two times in a financial year. Lastly, one must track how one’s funds are performing and make changes as necessary.

Interest Rate In NPS From Top Pension Fund Companies

The following are the NPS interest rates from top pension fund companies. 

1. ICICI Prudential Pension Fund Management Co. Ltd. 

Funds  Returns of 1 year (in %) Returns of 3 year  Returns of 5 year  Returns Inception 
Equities of Tier 1 17.50% 9.57% 14.44% 11.91%
Government Securities- Tier 1 13.45% 11.33% 10.68% 9.41%
Corporate Bonds – Tier 1  14.03% 9.98% 9.98% 10.64%
Alternative Assets – Tier 1  6.25% 7.55% - 7.37%
Government Securities– Tier 2 13.42% 11.28% 10.64% 9.53%
Equities of Tier 2 17.92% 9.74% 14.54% 10.24%
Corporate Bonds – Tier 2 14% 9.83% 9.87% 10.49%

2. LIC Pension Fund

Funds  Returns of 1 year (in %) Returns of 3 year  Returns of 5 year  Returns Inception 
Equities of Tier 1 15.33% 7.64% 13.11% 12.05%
Government Securities- Tier 1 13.79% 12.70% 11.86% 11.78%
Corporate Bonds – Tier 1  14.47% 10.05% 9.81% 10.54%
Alternative Assets – Tier 1  9.67% 9.16% - 8.28%
Equities of Tier 2 15.19% 7.54% 13.05% 9.47%
Government Securities– Tier 2 13.27% 13.37% 12% 12.07%
Corporate Bonds – Tier 2 16.36% 13.37% 12% 12.07%

3. HDFC Pension Management Co. Ltd.

Funds  Returns of 1 year (in %) Returns of 3 year  Returns of 5 year  Returns Inception 
Equities of Tier 1 18.81% 10.69% 15.72% 14.96%
Government Securities- Tier 1 14.26% 11.80% 10.88% 10.72%
Corporate Bonds – Tier 1  14.22% 10.36% 10.15% 10.71%
Alternative Assets – Tier 1  8.78% 8.90% - 8.63%
Equities of Tier 2 18.64% 10.59% 15.83% 12.72%
Government Securities– Tier 2 13.38% 11.55% 10.73% 10.94%
Corporate Bonds – Tier 2 13.70% 10.24% 10.16% 9.79%

Frequently Asked Questions About NPS Interest Rate

Is the interest rate in NPS fixed?

NPS interest rates are not fixed, as they are market-linked and vary based on market performance.

Is NPS withdrawal free from tax?

As per Section10 (12A) of the Income Tax Act of 1961, any withdrawal from the NPS trust is exempt from tax up to 60% of the total corpus due on maturity or while opting out of the NPS scheme.

Does NPS have a lock-in period?

No, NPS investments do not have a lock-in period. 

Is NPS a safe investment option?

NPS is a government-owned scheme and, as such, is a low-risk investment option compared to other available schemes. 

How many nominees can be named for an NPS account?

Up to 3 persons can be named nominees for a single NPS account. The nominees’ names, relationship with the account holder, and contribution percentage must be provided when nominated. Additionally, the sum of all percentages of the nominees’ contributions should add up to 100, or the nomination will be rejected.

Can a person hold more than one NPS account?

No, a single individual cannot hold more than one NPS account. 

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