BAJAJ BROKING
March 21, 2025
12 mins read
National Pension Scheme, NPS, is a government retirement scheme. Individuals can keep contributing throughout their working years of life to reap the benefits during their retirement years. The National Pension Scheme is managed by the PFRDA (Pension Fund Regulatory and Development Authority) and the central government. For all those people looking for a simple and secure retirement savings plan, NPS can be a good choice. NPS interest rate is one of the most striking features of why it is so popular.
You must also note that in the recent budget, the government introduced NPS Vatsalya, where parents can open an NPS account on behalf of their minor kids. Parents can keep contributing until their child becomes 18 years old, after which the child takes over the account. The interest rate earned on different types of NPS accounts makes it a lucrative option for many. Read on as we discuss all about NPS interest rates that you must know.
The National Pension Scheme, as discussed above, is a government-backed retirement plan. Individuals can open their NPS account and contribute wilfully until retirement to build a corpus. Being a social security initiative, NPS is open to individuals from the government sector, private sector, and unorganised working sectors as well. Armed forces are, however, not eligible for NPS. The NPS interest rate in 2025 for different NPS accounts was between 9-12%.
Over the years, individuals can build a corpus. Upon retirement, a part of this corpus can be withdrawn. The remainder is provided as a regular monthly pension after retirement. When the scheme was launched, it was limited to central government employees. However, now it is open to everyone except the armed forces. You are also eligible for tax benefits under Section 80C and 80CCD of the Income Tax Act of 1961.
The minimum and maximum entry age for NPS is 18 and 65 years, respectively
Individuals can withdraw up to 60% of the corpus upon retirement, and the rest is served as regular monthly income
There are two types of NPS accounts, Tier 1 and Tier 2
Parents of minor kids can also open an NPS Vatsalya account on behalf of their kids and manage it until the kids turn 18.
The National Pension System (NPS) offers two distinct types of accounts designed to suit varied financial needs—Tier I and Tier II. Tier I is a mandatory, long-term retirement account that comes with tax benefits and withdrawal restrictions, while Tier II is a voluntary, flexible account primarily used for liquidity and wealth creation. Tier I is the primary retirement savings vehicle under NPS, where the subscriber must make a minimum annual contribution of Rs.1,000. Withdrawals from Tier I are allowed only under specific conditions such as reaching 60 years of age, or for certain emergencies and partial withdrawals.
In contrast, the Tier II account functions like a savings account with no withdrawal restrictions or lock-in periods, making it ideal for individuals who seek market-linked returns along with high liquidity. However, Tier II does not offer tax benefits unless the subscriber is a government employee. While Tier I is essential for building a secure retirement corpus, Tier II is best suited for disciplined investors looking to park surplus funds with the flexibility of withdrawal. Both accounts can be managed online and are regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and governance in the retirement planning process.
The interest rate on an NPS account is calculated annually. So, the total amount invested receives the compound interest on the entire principal amount and the interest earned on it. Hence, the final retirement corpus becomes a much larger amount. Here is an illustration to help you understand how the interest rate is calculated on an NPS Tier 1 account:
Riteish, a 21-year-old private sector employee, started his NPS Tier 1 investment with ₹3,600 every month. So, Riteish kept investing for 39 years until his retirement at the age of 60.
Let's anticipate that the annual return on investment is at 8%. Upon retirement, Riteish also invests 40% of the corpus towards annuity and withdraws 60% of the corpus.
So, the total investment by Riteish is ₹16,41,600 while the total corpus built is ₹1,07,06,420. Out of this, Riteish withdraws ₹64,23,852 and invests the remaining 40% towards an annuity. The annuity investment yields a regular monthly income of ₹21,413.
So, you can see in the illustration above that with a small investment of ₹3,600 monthly, Riteish was able to build a huge corpus and get a monthly income of ₹21,413. So, the idea is to choose the funds correctly and stay invested for a long and continuously.
The NPS interest rate is not a fixed factor. It may fluctuate depending on the performance of the funds, government announcements, inflation, etc. So, there are multiple factors that drive the interest rate on NPS. Understanding these helps you get clarity on the returns that you may expect from your NPS investment. Factors that affect NPS interest rates are:
A part of the NPS corpus is invested in securities and bonds. So, the performance of the assets and funds has a decisive role in NPS returns. Each of the securities, like government or corporate bonds, equities, etc., vary in performance, and so do their returns. Usually, government bonds are more stable than equities.
There are various Pension Fund Managers who manage your NPS investment and assets. Their performance may also impact the overall performance of your funds. So, choosing a fund house carefully is crucial. There are multiple PFM to choose from. In case you are unsatisfied with the performance of your fund house, you need to compromise. You may switch to the pension fund manager if you want.
Different assets have different reactions to market fluctuations and conditions. So, choosing the right asset also becomes crucial. You must take into account your financial goals, risk appetite, investment horizon, etc. before choosing the NPS investment assets. Usually, equity funds are more volatile in comparison to government bonds. You may get help from a professional to help you choose the right funds according to your risk appetite and financial goals.
The performance of assets where NPS funds are invested is subject to market risks. So, both national and international economic conditions have an impact on the NPS returns. Changes in economic conditions globally or even within the country can affect the returns. Government announcements, RBI rules, etc., may impact the performance of the assets and, thus, returns on NPS. Any international financial crisis or boom can also impact the returns.
NPS investment yields high returns when you stay invested for longer. Since the investment is voluntary, you must avoid skipping installments to ensure a continuous investment habit. The longer you invest in NPS, the higher the returns. So, your investment habit also decides the overall returns that you are eligible for.
The National Pension Scheme offers lucrative tax benefits to the subscribers. There are broadly three types of contributors in an NPS account and the tax benefit is served accordingly. Tax benefit also depends on the type of withdrawal of the NPS balance. So, here are the details:¹
Self-contribution by Employees
Employees who contribute on their own are eligible for 10% tax deductions of their pay under Section 80CCD(1) and a maximum limit of up to ₹1.5 lakhs under Section 80CCE of the Income Tax Act of 1961.
Individuals can also claim tax deductions of up to ₹50,000 under Section 80CCD(1B) with a limit of ₹1.5 lakh under Section 80CCE of the Income Tax Act of 1961.
Employers who contribute on behalf of their employees are also eligible for tax benefits. They can claim tax deductions of 10% of their pay or 14% of their salary (applicable only to central government employees) under Section 80CCD(2). This is beyond the ₹1.5 lakh limit under Section 80CCE of the Income Tax Act of 1961.
Self-employed NPS subscribers can claim a 20% tax deduction on gross income under Section 80CCD(1). This deduction is limited to ₹1.5 lakhs under Section 80CCE. Along with this, they can also claim up to ₹50,000 deductions under Section 80CCD(1B), which is also limited to ₹1.5 lakhs under Section 80CCE of the Income Tax Act of 1961.
PFRDA has specified the special conditions under Section 10(12B) based on which an individual can partially withdraw the NPS balance before maturity. In such a case where the individual has withdrawn 25% of the NPS balance, they are still eligible for tax benefits. These are:
The annuity purchase or superannuation (at the age of 60 years) is exempted from tax. However, the returns generated by annuity investment are subject to taxation under 80CCD(3).
The NPS withdrawal upon superannuation up to 60% of the NPS balance remains tax-free under Section 10 of the Income Tax Act of 1961.
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% |
Anyone who is planning a retirement income can start investing in the National Pension Scheme. Apart from the armed forces, people from government, private, and even unorganized sectors are eligible for NPS subscriptions. A systematic retirement investment plan like NPS is quite suitable for many people, especially those in the private and unorganised sectors.
However, before you invest in it, there are a few factors that you must analyse for a more informed decision. These include:
Plan your investment horizon according to your current age. It helps you decide the exact tenure until which you need to keep investing. NPS investment can be done until the retirement age of 60 years. So, the earlier you start, the longer you can stay invested.
Make sure to learn about the withdrawal rules of NPS to avoid premature withdrawal. There are three types of NPS withdrawals:
Upon superannuation, which is, after reaching the age of 60. During this retirement age, 60% of the corpus can be withdrawn while 40% has to be invested in an annuity. However, if the amount is less than ₹5 lakhs, 100% amount can be withdrawn.
During premature exit (before 60 years of age), one has to invest 80% of the corpus in annuity if the amount is greater than ₹2.5 lakhs
Upon the death of the subscriber, 100% of the amount can be withdrawn.
NPS investment benefits are available for use after retirement. So, assess your financial plans so you can decide on a practical investment amount accordingly. Continuous investment can yield high returns. Up to 60% of the balance can be withdrawn, which can help you with various retirement financial goals, while the remaining 40% provides you with regular monthly income.
Last but not least, make sure to assess your risk appetite. It helps you choose the asset carefully. While some assets, like equity funds,, are more volatile, government bonds are more stable. The ones that are more volatile also have the potential for higher returns.
The National Pension Scheme is one of the most 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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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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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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The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
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Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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