November 11, 2025
10 mins read
National Pension Scheme, or NPS, is a government retirement plan. It’s run by PFRDA and backed by the central government.
What hooks many is the returns — NPS interest rates are often cited in the range of 9–12% depending on fund mix and tenure.
Also — quick aside — the budget introduced NPS Vatsalya, letting parents open accounts for minors until they turn 18. Small detail, big practical impact for families who want more control over early financial planning today.
The National Pension Scheme is a government-backed social security plan where subscribers contribute over time to build a retirement corpus. At superannuation, a portion is withdrawable and the balance is converted into a regular pension to fund post-work life comfort.
Initially confined to central government employees, NPS is now open to private and unorganised sectors as well, excluding armed forces. Members enjoy tax benefits under Sections 80C and 80CCD, which improve its appeal for disciplined long-term savers who value tax efficiency.
Entry age spans 18 to 65 years. Subscribers can withdraw up to 60% at retirement, leaving 40% to be annuitised for monthly income. Two account types—Tier I and Tier II—serve different needs and certain partial withdrawals are allowed in emergencies.
Tier I is the compulsory retirement account which has tax advantages and a requirement for a minimum annual contribution. While funds must remain in the account usually until age 60 in many cases, you can do a partial withdrawal in very limited circumstances like education or medical needs.
Tier II is voluntary and provides liquidity with the funds being available for you to withdraw at will and without any limitations. Tier II provides market-linked returns but in almost all cases will not have any tax advantages, so it is good for investors looking for flexibility and to invest surplus funds.
Both accounts are run online under PFRDA rules meaning fund managers and other investments can be moved easily and record keeping is completely transparent. Tier I is an account generally for retirement goals while Tier II is for your liquidity and tactical investing today.
Asset allocation in the NPS is a key element that determines how your contributions are distributed among different asset classes to balance risk and reward. There are four asset classes under NPS: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A). Subscribers can decide how much of their money goes into each asset type, subject to regulatory limits. For instance, equity allocation is capped at 75% for individuals up to the age of 50 and reduces thereafter.
Subscribers can choose between two investment strategies—Active Choice and Auto Choice. In the Active Choice model, they manually allocate percentages to different asset classes based on their risk appetite. This provides greater control but also requires more awareness and financial understanding. Meanwhile, the Auto Choice model adjusts the asset allocation automatically based on the subscriber’s age. Younger individuals are allocated more equity to maximise returns, while older subscribers shift to safer instruments like government securities.
This structured approach to asset allocation allows individuals to tailor their investment mix to suit their age, income, and risk tolerance, helping to build a more balanced and goal-oriented retirement corpus under the NPS framework.
Under the Active Choice option in NPS, subscribers have the flexibility to decide how their funds are distributed across different asset classes. This model empowers financially aware individuals to align their portfolio based on their unique risk appetite and investment horizon. However, each asset class has a maximum investment cap—equity (E) is capped at 75% for individuals below 50, and gradually reduces beyond that age. The remaining can be allocated between corporate debt (C), government securities (G), and alternative investments (A), with specific restrictions.
This approach requires active monitoring and decision-making, and is ideal for experienced investors who want control over their retirement corpus.
Asset Class | Description | Allocation Range |
Equity (E) | Invests in stock market instruments | Up to 75% (till age 50) |
Corporate (C) | Bonds issued by private companies | 0% to 100% |
Government (G) | Central and state government bonds | 0% to 100% |
Alternative (A) | Infrastructure and other funds | Up to 5% |
Auto Choice is a lifecycle-based investment strategy within the NPS where the asset allocation is determined automatically based on the subscriber’s age. This model is suited for individuals who are not well-versed with financial markets or prefer a hands-off approach. As you grow older, the allocation to equity (considered riskier) decreases, while investments in debt instruments such as corporate and government bonds increase. This gradual rebalancing aligns with the decreasing risk appetite as one approaches retirement.
There are three variants under Auto Choice—Aggressive (LC75), Moderate (LC50), and Conservative (LC25)—each indicating the maximum permissible equity exposure at age 35. The rest is allocated to corporate and government bonds in decreasing equity proportions as age increases. The aim is to balance growth and stability in a systematic, age-adjusted manner.
Plan Type | Equity (E) at Age 35 | Corporate (C) | Government (G) | Equity Tapering After Age 35 |
LC75 (Aggressive) | 75% | 10% | 15% | Reduces 4% annually till 15% |
LC50 (Moderate) | 50% | 30% | 20% | Reduces 2% annually till 10% |
LC25 (Conservative) | 25% | 45% | 30% | Reduces 1% annually till 5% |
NPS interest compounds annually, so both principal and accumulated returns earn the next period’s gains. Over decades, that compounding can turn modest contributions into a meaningful corpus, provided you stick with a disciplined investment habit.
Take Riteish’s case: he saved ₹3,600 monthly for decades and — assuming an illustrative NPS interest rate of 8% — his total contributions multiplied into a much larger corpus, letting him withdraw a portion and annuitise the rest for steady income.
Where your NPS money sits matters. Equities can spike or sag; bonds usually tread steadier. Fund mixes shift the long-term outcome a lot, so fund selection and allocation really change effective interest rates.
Managers make calls: which bonds, when to buy or sell. Their expertise — or lack of it — filters directly into returns. If a manager underperforms, switching PFMs is possible and often sensible.
Your allocation determines volatility and reward. More equity can lift long-term returns but raises short-term swings; bonds dampen volatility. Match assets to your risk appetite and horizon — that’s the core of getting sensible interest outcomes.
Inflation, RBI policy, global shocks: these aren’t academic; they shift yields and prices. A boom can lift returns, a crisis can squeeze them. Keep an eye on macro cues — they show up in your NPS performance.
It’s boring but true: consistency compounds. Skip contributions and your compounding curve flattens. Over decades, regular small investments beat erratic timing. Discipline is arguably the single practical driver of eventual corpus size.
Employees can claim deductions under Section 80CCD(1) for contributions up to 10% of salary within the ₹1.5 lakh Section 80CCE ceiling. An extra ₹50,000 relief is available under Section 80CCD(1B) for eligible taxpayers.
Employer contributions qualify for deduction under Section 80CCD(2), generally up to 10% of pay; central government employees have a higher 14% benchmark. This deduction does not eat into the ₹1.5 lakh Section 80CCE limit.
Self-employed subscribers can claim deductions under Section 80CCD(1), effectively up to 20% of gross income within the ₹1.5 lakh cap. Additionally, they may claim the extra ₹50,000 under Section 80CCD(1B) if eligible.
If you start young, compounding works in your favour. NPS allows contributions till 60 years, so decades of systematic investing help build a meaningful corpus.
At retirement you generally withdraw up to 60% as a lump sum and annuitise the remaining 40% for monthly income. Premature exits come with stricter annuitisation rules and lower flexibility, so plan accordingly.
Consider NPS as your retirement backbone: you can take up to a 60% lump-sum, which can go towards larger planned purposes, while the annuity funds will provide steady living expenses. As you prepare for retirement, base your contribution levels on your planned retirement expenditures, not on market noise.
If you tolerate volatility, a larger equity allocation can boost long-term returns; if not, tilt toward bonds. Whatever you pick, periodic rebalancing helps keep risk in check — and keeps expectations realistic.
Additional Read: NPS Returns: Features and Benefits
The National Pension Scheme is one of the popular government-backed schemes in India. Being a voluntary retirement scheme, individuals can willfully plan their retirement income. The attractive NPS interest rate is yet another factor that influences people towards this scheme. Compared to various other investments, NPS offers stable returns and low-risk exposure. All you have to do is keep investing until retirement and then start receiving regular monthly income.
NPS not only helps you create a retirement income but also builds a retirement corpus that can be utilised for various purposes. If you are also planning for an NPS account, now is the right time. Start planning a financially sound retirement today!
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In the year 2025 (January) so far, LIC PF Fund has generated the highest returns of 9.01% returns. Usually, the interest rate ranges between 9-12%. So, 12% can be expected as the highest interest rate that NPS accounts can offer.
The current NPS interest rate varies for different types of NPS account. However, as of June 2025, the NPS interest rate was between 9-12%.
The National Pension Scheme is a government-backed scheme. So, both risks and rewards are quite stable compared to other investment options. In comparison to stock market investments, NPS is stable and offers an attractive interest rate with low-risk.
Yes. NPS interest rate tends to fluctuate and change over time. It majorly depends on the performance of the fund where the corpus has been invested. So, the funds’ performance directly impacts the interest rate earned by an NPS account.
Since NPS invests in different funds, the performance of these funds have a direct impact on the interest rate that an NPS account yields. Other than this, government decisions, market condition, inflation, and the announcements by the Reserve Bank of India may also impact the NPS interest rates.
No. The interest rate on NPS accounts is not fixed. Rather it changes depending on the type of funds where the corpus is invested. So, for different accounts and in different year, the NPS interest rate may change.
The interest rate on National Pension Scheme accounts are calculated annually. So, individuals receive annualised returns. You may also use an NPS calculator to quickly calculate the expected returns over a period of time.
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