The National Pension System (NPS) is a government-backed retirement savings scheme in India. Unlike fixed-income instruments, NPS returns are market-linked and depend on the performance of underlying assets such as equities, corporate bonds, government securities, and alternative investments. As of 2025, NPS returns typically range between 9% and 12% per annum, varying based on asset allocation and fund manager performance.
NPS Returns by Asset Class (Tier I)
NPS investments are categorized into four asset classes:
- Equity (E): Invests in stocks.
- Corporate Bonds (C): Invests in corporate debt instruments.
- Government Bonds (G): Invests in government securities.
- Alternative Assets (A): Invests in assets like real estate investment trusts (REITs).
Returns vary across these classes:
| Asset Class | 1-Year Return (%) | 5-Year Return (%) | 10-Year Return (%) |
|---|---|---|---|
| Equity (E) | 29.41% – 40.95% | 18.74% – 21.08% | 13% – 14.39% |
| Corporate Bonds (C) | 9.05% – 9.66% | 7.18% – 7.99% | 8.46% – 9.04% |
| Government Bonds (G) | 12.16% – 12.71% | 7.41% – 7.73% | 9.04% – 9.63% |
| Alternative Assets (A) | 7.10% – 16.59% | 6.47% – 9.72% | N/A |
Note: Returns are subject to market risks and may vary based on the chosen fund manager and investment strategy.
How to Calculate NPS Returns
NPS returns are compounded annually and depend on factors like contribution amount, investment duration, and asset allocation. For instance, a 30-year-old investing ₹5,000 monthly until age 60, assuming a 10% annual return, could accumulate approximately ₹1.1 crore.
To estimate your potential corpus, you can use NPS calculator.
Tax Benefits of NPS
NPS offers attractive tax benefits under the Income Tax Act:
- Section 80CCD(1): Deduction up to ₹1.5 lakh within the overall limit of Section 80C.
- Section 80CCD(1B): Additional deduction up to ₹50,000, over and above the ₹1.5 lakh limit.
- Section 80CCD(2): Employer’s contribution up to 10% of salary (14% for central government employees) is deductible.
At maturity, 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity, which is taxable as per the individual’s income slab.
NPS Account Types
NPS offers two types of accounts:
- Tier I Account: This is the primary retirement account with tax benefits and restrictions on withdrawals.
- Tier II Account: A voluntary savings account with no tax benefits and greater flexibility in withdrawals.
Note: Returns in Tier II accounts are similar to Tier I but without the associated tax benefits.
Key Takeaways
- NPS offers market-linked returns, typically ranging between 9% and 12% per annum.
- Returns depend on asset allocation, fund manager performance, and market conditions.
- Investors can choose between Active and Auto choice investment options.
- NPS provides significant tax benefits under Sections 80CCD(1), 80CCD(1B), and 80CCD(2).
- Use the NPS Calculator to estimate your retirement corpus.
By understanding the dynamics of NPS interest rates and leveraging the associated tax benefits, investors can effectively plan for a financially secure retirement.
