The National Pension System (NPS) is a government-backed pension scheme regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). It aims to provide you with financial security after retirement with regular contributions during your working life. This scheme also provides tax benefits and an average NPS interest rate of 9% - 12% p.a. in 2024. It stands as an appealing long-term investment, securing a 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.
NPS offers you the flexibility to have 2 accounts: Tier 1 and Tier 2.
NPS Tier I account is focused on long-term retirement savings. Opening this account is mandatory to join the NPS scheme.
Tier 2 accounts allow you to save for any emergency needs.
NPS allows you to invest in a mix of equity, corporate bonds, and government securities. You can either actively manage your asset allocation or opt for an auto-choice option that adjusts the mix based on your age.
NPS is regulated by PFRDA, ensuring transparent investment rules and regular monitoring of fund managers by NPS Trust.
You can claim deductions under Section 80CCD(1) for contributions up to 10% of your salary (including Dearness Allowance) and under Section 80CCD(1B) for an additional contribution of up to Rs. 50,000.
The returns or interest from the NPS interest rates depends 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.
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 following table illustrates 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) | 6.99% - 7.51% | 7.08% - 8.05% | 8.33% - 8.90% |
| Equity (Class E) | 32.02% - 40-31% | 15.88% - 17.46% | 12.96% - 13.84% |
| Alternative Assets (Class A) | 6.83% - 12.07% | 5.70% - 9.05% | - |
| Government Bonds (Class G) | 7.92% - 8.34% | 7.56% - 7.78% | 8.68% - 9.42% |
*Last updated as of June 12, 2024.
| Classes of Assets | Returns of 1 year (in %) | Returns of 5 years (in %) | Returns of 10 years (in %) |
| Corporate Bonds (Class C) | 6.65% - 7.51% | 7.08% - 8.05% | 8.33% - 8.90% |
| Equity (Class E) | 31.39% - 40.04% | 15.88% - 17.48% | 12.31% - 13.92% |
| Government Bonds (Class G) | 7.77% - 8.37% | 7.44% - 7.76% | 8.70% - 9.47% |
*Last updated as of June 12, 2024.
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
(According to NPS regulations, 40% of the accumulated corpus is utilized to procure an annuity when she turns 60.)
You can use the NPS calculator to evaluate the retirement corpus, interest earned on it, the amount used to purchase an annuity, and the expected monthly pension from the chosen best annuity plan.
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 returns:
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.
The table below illustrates the NPS interest rates from the top pension fund managers:
| Funds | Returns of 1 year (in %) | Returns of 3 years | Returns of 5 years | Returns since Inception |
| Equities of Tier 1 | 36.71% | 18.39% | 17.46% | 13.61% |
| Government Bonds- Tier 1 | 7.92% | 5.93% | 7.53% | 8.51% |
| Corporate Bonds – Tier 1 | 7.34% | 5.65% | 7.57% | 9.52% |
| Alternative Assets – Tier 1 | 8.98% | 6.29% | 6.42% | 6.82% |
| Government Securities– Tier 2 | 7.77% | 5.96% | 7.55% | 8.57% |
| Equities of Tier 2 | 35.90% | 18.33% | 17.48% | 12.36% |
| Corporate Bonds – Tier 2 | 7.25% | 5.61% | 7.52% | 9.35% |
*Last updated as of June 12, 2024.
| Funds | Returns of 1 year (in %) | Returns of 3 years | Returns of 5 years | Returns since Inception |
| Equities of Tier 1 | 33.22% | 17.70% | 16.57% | 14.21% |
| Government Bonds- Tier 1 | 7.99% | 6.03% | 7.75% | 9.80% |
| Corporate Bonds – Tier 1 | 7.01% | 5.53% | 7.73% | 8.98% |
| Alternative Assets – Tier 1 | 8.02% | 6.67% | 7.33% | 7.48% |
| Government Securities– Tier 2 | 7.99% | 6.08% | 7.76% | 10.01% |
| Equities of Tier 2 | 31.60% | 17.41% | 16.43% | 12.34% |
| Corporate Bonds – Tier 2 | 67.02% | 5.51% | 8.09% | 8.51% |
*Last updated as of June 12, 2024.
| Fund | 1-year Returns(%) | 3-year Returns(%) | 5-year Returns(%) | Returns Inception |
| Equities of Tier 1 | 32.97% | 17.07% | 17.11% | 15.99% |
| Government Bonds- Tier 1 | 8.29% | 6.03% | 7.76% | 9.07% |
| Corporate Bonds – Tier 1 | 7.51% | 5.94% | 8.05% | 9.23% |
| Alternative Assets – Tier 1 | 10.57% | 8.26% | 8.33% | 8.43% |
| Government Securities– Tier 2 | 8.36% | 5.98% | 7.57% | 9.19% |
| Equities of Tier 2 | 33.18% | 17.15% | 17.11% | 14.46% |
| Corporate Bonds – Tier 2 | 7.59% | 5.85% | 7.90% | 8.57% |
*Last updated as of June 12, 2024.
The table mentioned below illustrates the NPS interest rates of top-performing equity pension fund managers of Tier- 1 Accounts in 2024-2025:
| Pension Fund Managers | 1-Year Returns (%) | 3-Year Returns (%) | 5-Year Returns (%) |
| HDFC Pension Fund | 9.56% | 14.72% | 11.90% |
| Reliance Pension Fund | 9.15% | 12.05% | 10.32% |
| Kotak Mahindra Pension Fund | 9.28% | 13.00% | 11.12% |
| ICICI Pension Fund | 9.30% | 13.11% | 11.12% |
| UTI Retirement Solutions | 8.77% | 13.50% | 11.85% |
| Aditya Birla Pension Fund | 7.12% | NA | NA |
| LIC Pension Fund | 8.13% | 11.86% | 10.22% |
| SBI Pension Fund | 9.73% | 13.49% | 11.38% |
*Last updated as of June 12, 2024.
The top-performing NPS Tier-2 Equity Funds with the highest returns are as follows:
| Term of the Plan (in Years) | Name of the Pension Fund | Highest return (in %) |
| 1-Year | SBI Pension Fund | 9.71% p.a. |
| 3-Year | UTI Retirement Solutions | 14.87% p.a. |
| 5-Year | HDFC Pension Fund | 11.96% p.a. |
*Last updated as of June 12, 2024.
The below-mentioned table illustrates the interest rates of NPS Tier 2 top-performing equity pension fund managers in 2024-2025:
| Pension Fund Managers | 1-Year Returns (%) | 3-Year Returns (%) | 5-Year Returns (%) |
| HDFC Pension Fund | 9.47% | 14.87% | 11.50% |
| UTI Retirement Solutions | 9.39% | 13.66% | 11.96% |
| ICICI Pension Fund | 9.32% | 13.16% | 11.14% |
| LIC Pension Fund | 8.51% | 11.74% | 8.97% |
| Reliance Pension Fund | 8.94% | 12.08% | 10.32% |
| Kotak Mahindra Pension Fund | 9.54% | 13.03% | 11.12% |
| SBI Pension Fund | 9.71% | 13.50% | 11.39% |
| Aditya Birla Pension Fund | 6.61% | NA | NA |
*Last updated as of June 12, 2024.
Hence, the top-performing Tier-2 Equity Funds and the highest NPS Tier 2 interest rate returns are mentioned as follows:
| Term of the Plan (in Years) | Name of the Pension Fund | Highest return (in %) |
| 1- Year | SBI Pension Fund | 9.71% p.a. |
| 3- Year | HDFC Pension Fund | 14.87% p.a. |
| 5- Year | UTI Retirement Solutions | 11.96% p.a. |
*Last updated as of June 12, 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. |
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 interest rate 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.
*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^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
~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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