NPS Interest Rate 2023

Along with the benefit of financial protection after retirement, the NPS scheme also offers the advantage of tax savings. With a current NPS interest rate of 9%-12%, this is one of the most lucrative options of investment for individuals who want to create a financial cushion in the long term and secure their retirement phase.  Let’s read further to know in detail about the interest rate on the NPS scheme.

What is NPS Interest Rate?

NPS is a voluntary pension fund, which is regulated by the Pension Fund Regulatory and Development Authority of India. The individual can start contributing towards the NPS scheme with a minimum contribution of Rs. 6,000 in a financial year, which can be paid as lump-sum or as a monthly installment of Rs. 500. The contributed amount is invested in market-linked securities with an objective to create long-term investment return and is compounded annually.

Currently, the NPS interest rate ranges between 9%- 12%. Any Indian citizen between the age group of minimum 18 years to a maximum of 60 years can subscribe to the scheme. The maturity age of the scheme can be further extended up to 70 years. In case of a specific situation such as buying a home, treatment of any critical illness, or sponsoring a child’s higher education, the subscribers can make a partial withdrawal of up to 25% of the fund after completion of 3 years of the scheme from the date of opening the scheme.

NPS Interest Rate 2021-22

The returns or interest from the national pension scheme depends on the contribution made towards the scheme and the asset classes chosen. The returns generate on NPS investment are market-linked, as the money is invested in equities and debt. Based on the asset class chosen by the subscriber and the amount of contribution made by them, the interest is applicable. 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 contribution an individual makes towards the scheme; the higher retirement corpus they can create over a specific tenure. Moreover, the advantage of the power of compounding makes NPS a lucrative option for retirement planning.

NPS offers you the flexibility to have 2 accounts which are Tier 1 and Tier 2 accounts. Below table illustrates the individual return for Tier 1 and Tier 2 schemes: 

1. NPS Tier 1 Returns 

   Classes of Assets	Returns of 1 year (in %)	Returns of 5 year	Returns of 10 year
   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%

2. NPS Tier 2 Returns 

   Classes of Assets	Returns of 1 year (in %)	Returns of 5 year	Returns of 10 year
   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 NPS Interest Rate

The interest rate on NPS is computed based on monthly compounding. Let’s see an example to understand it in a much better way. Ms. Richa is 25 years old and wants to invest Rs. 5,000 per month in the NPS scheme. The expected rate of return is 10%, she desires to retire at the age of 60 years. As per the NPS rules, she uses 40% of the corpus to purchase an annuity at the age of 60 years.

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

For Richa,

P = INR 5,000

r = 10% per year or 0.83% per month

N = 420 months (35 years until retirement)

FVA = (5000* (1 + 0.0083) ^ 420-1)/ 0.0083

FVA= INR 1,89,83,190.26

The contribution made is INR 21 lakh and the interest earned is INR 1. 68cr.

Out of INR 1.89Cr, 40% is used to purchase an annuity that is INR 75.93 lakhs. The accumulated sum Ms. Richa will receive after attaining the age of 60 is INR 1.13 Cr. This sum will be 60% of the retirement corpus, which is entirely tax exempted. The rest 40% of the accumulated sum used to purchase an annuity will be given to Ms. Richa as a monthly pension for the tenure chosen by her.

The subscriber 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 an annuity.

Taxation of NPS Interest Rate

The contribution made towards the NPS scheme is qualified for tax exemption under Section 80C of the Income Tax Act. Thus, the subscriber can claim a tax exemption up to a maximum of Rs.1 .5 lakhs in a financial year. Moreover, the subscribers can also claim a tax exemption on investment up to Rs. 50,000 over and above the limit of Rs. 1.5 lakh in a financial year U/S 80CCD (1B). Also, U/S 80CCD (2) the subscriber can claim an additional limit on the contribution up to 10% of the basic salary of the employee made by the employer. However, the add-on deduction is applicable only for employees and there is no upper limit on that.

For the financial year 2020-2021, the taxation of the NPS scheme has been revised by the government. The entire 60% of the withdrawal amount on maturity is entirely tax-exempted. Earlier out of 60%, only 40% was tax exempted. The rest 20% was taxed as per the IT slab rate of the subscriber.

Interest Rates of NPS from Top Pension Fund Companies 

Below table illustrates the interest rates of the National Pension System from top pension fund managers: 

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 Limited 

   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%	-	8.26%
   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%

Interest Rates of NPS for Tier 1 Account 

Below table illustrates the interest rates of NPS Tier 1-top performing equity pension fund managers in 2023-2024

So, the top-performing NPS Tier 2 Equity fund returns are from SBI Pension Fund (9.73%), HDFC Pension Fund (11.90%), and UTI Retirement Solutions (13.50%) for 1 year, 3 years, and 5-year tenures. 

Interest Rates of NPS for Tier 2 Account 

The below table illustrates the interest rates of NPS Tier 2- top-performing equity pension fund managers in 2023-2024.

So, the top-performing NPS Tier 2 Equity fund returns are from SBI Pension Fund (9.71%), HDFC Pension Fund (14.87%), and UTI Retirement Solutions (11.96%) for 1 year, 3 years, and 5-year tenures.