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Like all other investment schemes, NPS offers substantial returns at a particular rate. This NPS interest rate is linked to the combination of underlying market securities such as equity or government or corporate bond markets, among other investment instruments.
With a record of earning rates around 9-12%, NPS is considered a very safe investment vehicle. However, this scheme does not establish any fixed interest rate.
So, how exactly can investors be sure of their returns?
Let’s find out!
A question a reader may have is: how can the interest rate for NPS not be fixed? Here’s how!
When a person invests in the National Pension Scheme, there are two options. First, they can invest “Actively” or choose an “Auto” mode of investment.
Further, in the “Active” investment mode, investors will need to choose the class of investment (Class A, G, C, E), the percentage of their investment in these classes, and the fund manager.
Whereas, in the “Auto” mode, they can choose from one of 3 investment options based on the risks associated.
Therefore, NPS interest rates depend on all underlying funds in which they are invested. Since interest rates for different fund houses and asset types are different, interest rates are not fixed.
Further, any reader may be curious about what is the NPS interest rate for these different investment classes. The table below shows a range of interest rates for 5 and 10 years for the different investment classes.
| Asset Classes | 1-Year Returns (%) | 5-year Returns (%) | 10-year Returns (%) |
| Class E | 15.33%-18.81% | 13.11%-15.72% | 10.45%-10.86% |
| Class C | 12.46%-14.47% | 9.27%-10.15% | 10.05%-10.64% |
| Class G | 12.95%-14.26% | 10.29%-10.88% | 9.57%-10.05% |
| Class A | 3.98%-16.73% | - | - |
| Asset Classes | 1-Year Returns (%) | 5-year Returns (%) | 10-year Returns (%) |
| Class E | 15.19%-17.92% | 13.05%-15.83% | 10.35%-10.58% |
| Class C | 12.71%-16.36% | 9.55%-10.17% | 9,86%-10.60% |
| Class G | 12.61%-13.42% | 10.40%-12.00% | 9.59%-10.07% |
|
Tier I or Tier II NPS Account Type |
Investment Class |
5 Years Returns from Top Funds |
|
Tier I |
Class E, Class C, Class G, Class A |
11-15%, 10%, 9-11%, 7-8% |
|
Tier II |
Class E , Class C, Class G |
9-12%, 9-10%, 9-12% |
The table shows an approximate NPS current interest rate for the different investment classes under the Tier I and Tier II accounts.
As can be seen from the rates provided by the top fund houses for each asset class, the NPS interest rate 2021 hovers around the 9-12% mark.
NPS can earn more interest than PPF and FDs. However, it is not tax efficient upon maturity. One can withdraw up to 60% of the accumulated amount from the NPS account, out of which 20% is taxable. As per the latest information, 20% of this amount is taxable. Nonetheless, taxability on NPS withdrawal is subjective and can change.
However, those are not the only benefits of NPS investment. NPS contribution is also applicable for a tax deduction. The details are below.
The NPS interest rate for Tier 1 accounts are given below:
|
Tier I Accounts |
3 Years Returns |
5 Years Returns |
|
Range of interest rate for the top funds |
11-14% |
10-11% |
For Tier II the interest on NPS is given below:
|
Tier II Accounts |
3 Years Returns |
5 Years Returns |
|
Range of interest rate for the top funds |
11-14% |
8-11% |
No, the very nature of NPS and its investment in market-linked securities makes the interest impossible to fix. Historically, the average interest rate of the funds has hovered between the 9-12% mark.
As explained before, there are different classes of investment depending on the investment in debt or equity instruments. Moreover, the interest earned depends on the percentage of investment in different schemes. Since NPS is tied to the underlying funds, it earns differently for different investors and their investment preferences.
In conclusion, the NPS interest rate is not fixed and cannot be so because of the inherent link to fluctuating interest rates of different asset classes. Hence, investors are advised to invest in the scheme with caution as per their risk appetite.
Finally, the NPS interest rate has varied historically between 9-12%, which is viewed as quite a high rate of return compared to other low-risk investment vehicles for pensions such as the nearest rival, PPF. Therefore, the National Pension Scheme is quite an attractive investment option for a retirement fund.
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