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NPS Interest Rates for Tier 1 & Tier 2 Cities

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 9-15%, 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!

How Are NPS Rates Determined?

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 in 2021.

Asset Class	5 Years Returns (approximate)	10 Years Returns (approximate)
Class E	13-15%	10-11%
Class C	9-10%	10-10.5%
Class G	10.2-10.8%	9.5-10%
Class A	4%-16% (1 year returns)	4%-16% (1 year returns)

What Are NPS Interest Rates 2020-21?

NPS interest rate 2020-21 for Tier I and Tier II NPS accounts in the different investment classes is summarised below.

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.

Is NPS Interest Taxable?

Well, the short answer is no. Returns from NPS investments are fully tax-exempted. Therefore, when 60% of the corpus is returned to any subscriber at age 60, the entire corpus comes tax-free per FY 2020-21.

However, those are not the only benefits of NPS investment. NPS contribution is also applicable for a tax deduction. The details are below.

Subscribers of NPS should note that NPS is a part of the tax-saving investment instruments of Section 80CCD. Therefore, it implies that up to ₹1.5 lakhs invested in NPS and other 80CCD instruments cumulatively are applicable for a tax deduction.
However, the good news is that subscribers can claim an additional tax deduction of up to ₹50,000 for contribution to NPS. This deduction is claimed over and above the normal 80CCD deduction.
Moreover, if an employer contributes on behalf of an employee, the employee can claim a 10% tax deduction of their salary.

What Is The NPS Interest Return Rate for a Tier 1 Account?

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%

What Is The NPS Interest Return Rate for a Tier 2 Account?

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%

Does NPS Provide a Fixed Interest Rate?

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.

Frequently Asked Questions

✓ How many times a year can a subscriber invest in the National Pension Scheme?

There is no upper limit on the number of times a year subscribers can invest in the National Pension Scheme. This fact means that frequency and contribution per annum depend solely on a subscriber. However, it is recommended that there be a minimum investment of ₹1000 per year to receive a substantial corpus.

✓ What factors influence the withdrawal corpus amount?

Since the National Pension Scheme is a market-linked security, its withdrawal corpus amount depends on the performance of the asset class underlying an investment. However, investment returns also depend on the subscription amount you put in until withdrawal and fund growth.

✓ Where can I open a National Pension Scheme account?

You can open an NPS from a Point of Presence Service Provider which are banks or non-banking institutions. Additionally, you can open an NPS account online from the eNPS website.