NPS interest rate and how it impacts your retirement corpus

One of the top financial goals of every individual is to have a stress-free retirement life and enjoy the golden years. To help citizens save systematically for their retirement and achieve this goal, the Government of India launched the National Pension Scheme (NPS).

One of the most attractive features of the scheme is that upon maturity, you can withdraw up to 60% of the contributed amount. The remaining 40% must be used to purchase an annuity, which is also tax-free (although subsequent monthly income payouts attract tax as per income bracket). 

Another reason the scheme is appealing is the returns are market-linked. Wealth creation accelerates when you invest in market-linked schemes with a horizon of over five years. Hence, unlike other government instruments, which offer a maximum interest rate of 8.4%, the NPS interest rate is historically known to range from 8% to 15%. 

Since the minimum age to start investing in NPS is 18, and the scheme reaches maturity when the subscriber turns 60, NPS is an effective instrument for wealth creation and building a retirement corpus. 

What is the NPS Interest Rate?

Government schemes typically have a fixed interest rate because most schemes are debt-based, which are considered more secure investment avenues. However, wealth creation opportunities of debt-based plans are limited.

In the case of NPS, one’s contribution typically goes into equities, government bonds, corporate bonds, real estate investment trusts (REITs), commercial mortgage-backed securities, and alternative investment funds. However, equity exposure can range up to 75% when one is younger. This exposure to equity decreases as one gets closer to the retirement age of 60. This strategy aims to reduce risk as one grows older.  

Contributions to the NPS scheme are managed by these pension fund managers:

• ICICI Prudential Pension Fund
• LIC Pension Fund, Kotak Mahindra Pension
• Fund Reliance Capital Pension Fund
• SBI Pension Fund
• UTI Retirement Solutions Pension Fund
• HDFC Pension Management Company

Hence, the NPS return rate fluctuates based on the mix of asset classes. It also varies for Tier 1 and Tier 2 investments as follows: 

Interest Rate On NPS for Tier I

Since NPS is a market-linked scheme, the National Pension Scheme interest rate varies based on the pension fund and the market trajectory that year.

As of January 15, 2021, for instance, the following funds – SBI Pension Fund at 9.73%, for three years by UTI Retirement Solutions at 13.50%, and for five years by HDFC Pension Fund at 11.90% – earned the best returns for one year.

Interest Rate On NPS for Tier 2

Investments in Tier 2 can also generate competitive interest rates. As of January 15, 2021, the following funds earned the best returns for one year: SBI Pension Fund at 9.71%, for three years, HDFC Pension Fund at 14.87%, and for five years by UTI Retirement Solutions at 11.96%. NPS subscribers, however, tend to prioritise Tier I investments due to the tax deduction benefits. Secondly, one can only open Tier II after opening a Tier I account.

How to Calculate NPS Interest

Today, you can use several dedicated NPS calculators to calculate the exact returns on your NPS contributions. Since the NPS interest rate is not fixed and depends on the market performance, you can predict the maturity amount and monthly pension amount by arriving at some fixed variables. 

The variables that one must input into the calculator include: 

• Age of the subscriber
• Amount contributed per month
• Expected return on investment (as a percentage)
• Total years of contribution (60 minus your current age)
• Percentage of annuity purchase (minimum is 40%)  

Based on the variables, you will get an estimate of the maturity amount when one reaches the age of 60. You can also get an estimate of the monthly pension amount, depending upon the percentage of annuity you aim to purchase. Annuity refers to the amount reinvested, which is then paid out as annual income. The higher the annuity, the higher the pension income you will receive in the consecutive years post-retirement.

NPS Interest Rate Taxation

• On reaching maturity, you can withdraw up to 60% of the total pension amount, entirely tax-free.
• You must use the remaining 40% to purchase an annuity, also tax-free.
• The annuity income you receive in the following years will be considered income and taxed per your tax bracket. 

Interest Rates of NPS from Top Pension Fund Companies

The NPS current interest rate keeps fluctuating based on the market returns. However, this table offers a snapshot of the top performing pension fund companies for Tier I in 2021-2022, which comprise HDFC Pension Fund, UTI Retirement Solutions, and SBI Pension Fund. (Source)

The top-performing pension fund companies for Tier 2 in 2021-2022 were HDFC Pension Fund, UTI Retirement Solutions, and SBI Pension Fund.

Final Thoughts

When planning for retirement, it is best to put your eggs into multiple baskets to balance risk with wealth-creation rewards. Funding an NPS account right from the age of 18 will enable you to get a headstart in building a generous retirement corpus. Since the returns are market-linked, and the NPS has a long-term investment horizon, NPS presents a unique opportunity for wealth creation that can potentially beat inflation. The earlier you start investing, the more prepared you are to live out the golden years without any struggles!

FAQs