Proper and meticulous financial planning is required to ensure one can spend their life after retirement with utmost relief. Today, there are multiple options when it comes to securing finances for post-retirement life. The Government of India also endorses several financial schemes customised for this purpose.
The National Pension Scheme or NPS is one such government-sponsored option that allows individuals to invest and save for life post-retirement. It is also one of the few government schemes that do not have a fixed rate of return. NPS interest rates are market-linked, meaning they fluctuate based on how the market is performing.
Essentially, NPS is a voluntary pension fund. People can invest in their NPS account from time to time until maturity. The entire scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Government of India.
NPS involves two account types –
As mentioned earlier, the National Pension Scheme is a market-linked option. Hence, investments under it are channelled toward assets like equities and debts.
The National Pension Scheme interest rate depends on the performance of those assets in the market. Therefore, the amount one is to receive upon retirement is not predetermined.
The NPS Interest Rate relies on the performance of the assets. Thus, the amount receivable on retirement cannot be determined prior.
NPS is a market-linked product where one can invest in corporate debt, government debt, equity, and alternative assets too. When a choice of assets and the fund manager is chosen, the sum of money is invested in certain schemes investing in these four classes of assets.
National Pension Scheme offers the flexibility to own two accounts i.e. Tier I and Tier II accounts. Following are the returns shown for Tier I and Tier II schemes.
The NPS Current Interest Rate for both Tier I and Tier II accounts are-
|
Asset Classes |
1-year Returns(%) |
5-year Returns(%) |
10-year Returns(%) |
|
Equity |
15.33%-18.81% |
13.11%-15.72% |
10.45%-10.86% |
|
Corporate Bonds |
12.46%-14.47% |
9.27%-10.15% |
10.05%-10.64% |
|
Government Bonds |
12.95%-14.26% |
10.29%-10.88% |
9.57%-10.05% |
|
Alternative Assets |
3.98%-16.73% |
- |
- |
|
Asset Classes |
1-year Returns(%) |
5-year Returns(%) |
10-year Returns(%) |
|
Equity |
15.19%-17.92% |
13.05%-15.83% |
10.35%-10.58% |
|
Corporate Bonds |
12.71%-16.36% |
9.55%-10.17% |
9.86%-10.60% |
|
Government Bonds |
12.61%-13.42% |
10.40%-12.00% |
9.59%-10.07% |
Individuals can make periodical contributions in their NPS accounts until retirement. PRFDA-registered pension fund managers manage these contributions, of which there are eight at present. These include –
Reliance Capital Pension Fund Limited is a public established on 31 March 2009. It is categorised as a non-government company and is registered at RoC-Mumbai.
HDFC Pension Fund is part of the HDFC group. It is one of the largest financial conglomerates present in India. In the year 2013, it launched its first NPS funds.
Kotak Pension Fund Limited is a joint venture between Kotak Mahindra Bank and Kotak Mahindra Asset Management Limited. This fund was appointed as a Pension Fund Manager on 30th April 2009.
UTI Retirement Solutions Limited is an open-ended retirement solution-oriented scheme.
Incorporated in 2015, Aditya Birla Sun Life Pension Fund is a wholly owned subsidiary of Aditya Birla Sun Life Insurance Company Limited.
ICICI Prudential Pension Fund Management Company Limited began its operations in May 2009.
It is an affiliate of the State Bank of India. SBI Pension Fund is India’s top-performing pension fund for many years.
LIC Pension Fund Limited is a public limited company located in Mumbai. It was incorporated on 21st November 2007.
The invested amount, or principal, accrues returns throughout the tenure based on the invested assets’ performances. Historically speaking, NPS interest rates have varied between 9% – 12%.
After retirement, individuals can withdraw a portion of the accumulated amount in a lump sum, which is capped at 60%. The rest of such amounts are used to invest in an annuity plan. Thereby, the beneficiary will receive a fixed monthly pension.
Asset allocation is one of the primary factors that influence NPS interest rates. NPS involves four types of asset classes. The following table illustrates these types.
| Asset Class | Asset Type |
| Class G | Government Bonds |
| Class E | Equities |
| Class C | Corporate Bonds |
| Class A | Real Estate Investment Trusts (REITs), Commercial mortgage-backed securities, and alternative investment funds. |
Individuals can choose any of the two investment choices under the National Pension Scheme –
By opting for active choice, individuals can decide how their funds will be allocated across different asset classes. However, the maximum percentage one can choose to invest in asset class E, i.e. equities is capped at 75% until one attains 50 years of age.
After reaching 51 years, the maximum percentage one can invest in equities decreases gradually, per predetermined rates.
This is mentioned in the table below.
| Age | Maximum Allocation to Equity |
| 60 years | 50% |
| 59 years | 52.5% |
| 58 years | 55% |
| 57 years | 57.5% |
| 56 years | 60% |
| 55 years | 62.5% |
| 54 years | 65% |
| 53 years | 67.5% |
| 52 years | 70% |
| 51 years | 72.5% |
Aside from this, individuals can choose to commit a maximum of 5% of their total funds to Alternative Investment Funds (AIFs). Other asset classes do not invite any restriction in this regard.
Individuals looking for a high National Pension Scheme rate of interest shall opt for a higher allocation to equities. However, they should also consider the risk potential of such investment and align it with their risk aptitude.
In this case, the allocation is based on the lifecycle fund that an individual has chosen. There are three types of lifecycle funds, segregated based on the overall risk quotient. These are –
Naturally, each fund features varying asset allocations to achieve differing risk factors. One shall note, however, that under auto choice one cannot avail of the option of asset class A.
With all three such funds, the risk factor dilutes more and more based on the investor’s age.
Individuals with low-risk appetites might choose to go with a conservative lifecycle fund. The asset allocation of a conservative lifecycle fund is given below in the table.
| Age | Asset Allocation | ||
| E | G | C | |
| Up to 35 years | 25% | 30% | 45% |
| 40 years | 20% | 45% | 35% |
| 45 years | 15% | 60% | 25% |
| 50 years | 10% | 75% | 15% |
| 55 years | 5% | 90% | 5% |
Individuals looking for a high NPS interest rate can opt for the aggressive portfolio. The following table demonstrates the asset allocation of an aggressive lifecycle fund.
| Age | Asset Allocation | ||
| E | G | C | |
| Up to 35 years | 75% | 15% | 10% |
| 40 years | 55% | 30% | 15% |
| 45 years | 35% | 45% | 20% |
| 50 years | 20% | 60% | 20% |
| 55 years | 15% | 75% | 10% |
The asset allocation in a moderate lifecycle fund is mentioned in the following table.
| Age | Asset Allocation | ||
| E | G | C | |
| Up to 35 years | 50% | 20% | 30% |
| 40 year | 40% | 35% | 25% |
| 45 years | 30% | 50% | 20% |
| 50 years | 20% | 65% | 15% |
| 55 years | 10% | 80% | 10% |
Hence, the NPS interest rate 2021 one can earn by investing in the National Pension Scheme mainly depends on the investment choice and fund type thus selected. Also, individuals can choose to alter their investment choices twice in one financial year for both Tier-I and Tier-II accounts.
Another factor that has some bearing on the rate of return from an NPS account is the fund manager. Different fund managers boast varying rates of return. Individuals can change their fund managers and also opt for different PFMs for Tier-I and Tier-II accounts.
Hence, it is essential to closely track how one’s funds are performing and make due changes to align them with their investment objectives.
NPS is open to all the citizens of India between the ages of 18 – 60 years. Individuals looking for higher returns on their retirement savings can make use of NPS current interest rate. However, in doing so, individuals should consider their risk appetite and the returns they are expecting.
One should further consider their knowledge about the financial markets before opting for either of the two NPS investment choices mentioned above.