National Pension Scheme (NPS) Returns: Tier 1 & Tier 2 Explained

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Understanding NPS Returns: A Comprehensive Guide

The National Pension System (NPS) is a government-sponsored pension scheme that comes with benefits and flexibility in contributions designed to provide financial security in retirement. Launched in India, it offers individuals a systematic way to accumulate a retirement corpus and receive regular income post-retirement. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

NPS is open to all Indian citizens between 18 to 70 years, including NRIs and OCIs, except for PIO cardholders and HUF. It operates on a defined contribution basis, where individuals contribute regularly during their working years and receive a pension post-retirement.

NPS provides an excellent retirement solution for government employees, offering portability across jobs and cities. For the public, especially the self-employed, it serves as a valuable pension-building tool, offering tax benefits as well.

NPS Returns: An Overview

The national pension scheme returns refer to the gains or profits earned on the contributions made by individuals or corporates into their NPS accounts over a certain period. These returns are based on the performance of the investments managed by fund managers in various asset classes like equities, government securities, corporate bonds, and alternative investment funds within the NPS framework.

Current NPS returns are crucial for retirement planning because they directly impact the accumulated pension wealth of individuals. The returns on NPS investments determine the size of the retirement corpus, which eventually translates into the pension or regular income received post-retirement. Higher returns imply a larger corpus, providing individuals with a higher income during their retirement years.

The Pension Fund Regulatory and Development Authority (PFRDA) plays a pivotal role in managing NPS returns by regulating and overseeing the entire NPS framework. It sets guidelines and regulations for fund managers, ensuring transparency, fairness, and compliance with investment norms. PFRDA monitors the performance of PFMs, conducts periodic reviews, and imposes necessary regulations to safeguard the interests of NPS subscribers.

NPS funds allocate investments across different asset classes:

Equity: This involves investing in stocks of companies, providing growth-oriented returns but with higher volatility.
Corporate Bonds: These are debt instruments issued by corporations, offering comparatively stable returns compared to equities with lower risk.
Government Bonds: Investment in securities issued by the government, known for stability and low risk, offering moderate returns.
Alternative Assets: NPS allows a small allocation to alternative investment funds (AIFs), which may include investments in real estate, infrastructure, etc., aiming for diversification and potentially higher returns.

The distribution among these asset classes varies based on the chosen investment strategy (Active Choice or Auto Choice), age, risk tolerance, and other factors of the NPS subscriber. This diversification optimises returns while managing risk according to individual preferences and goals.

Types of NPS Investment Options and Their Returns

NPS Investment Options

Scheme	Stamp Duty Description
Equity	Invests primarily in equities, focusing on large-cap companies and mid-cap firms.
Corporate Debt	Emphasises minimising credit risk while optimising returns, largely comprising AAA and AA+ rated corporate bonds.
Government	Invests in government securities with a balanced approach of dynamic portfolio management and higher portfolio carry.

Historical Returns of NPS Schemes

Comparative Analysis of Returns

Scheme	Returns (%) over 10 Years
Equity	14.3
Corporate Debt	8.7
Government	9.0

Investment Scheme	10-Year Returns	Investment Composition	Risk Profile
Equity Scheme	14.3%	Large-cap stocks with select mid-caps	Higher risk-reward profile
Corporate Debt Scheme	8.7%	AAA and AA+ rated corporate bonds	Lower credit risk, moderate returns
Government Scheme	9.0%	Government securities	Balanced approach, lower risk

NPS vs Other Pension Schemes

Aspect	NPS	EPF (Employees' Provident Fund)	PPF (Public Provident Fund)	Pension Plans (Private Insurers)
Age Limits	18-70 years	Generally, up to 58 years	15 years, extendable	Varies by policy and provider
Minimum Contributions	Rs 500 minimum per contribution in Tier-I; Rs 1,000 minimum per year in Tier-I	Mandatory contribution from salary, generally 12% of basic salary	Rs 500 per year (minimum)	Varies by policy and provider
Tax Benefits	Deductions under Sec 80CCD (up to Rs 1.5 lakh), additional Rs 50,000 under Sec 80CCD(1B), and employer contribution under Sec 80CCD(2) according to the old tax regime. Particularly for New Tax regime – 80CCD(2) employer’s NPS contribution or assisted through employer is the ONLY Tax benefit allowed. NPS withdrawals are Tax free.	Tax exemption on contribution, interest, and withdrawal	Tax deduction under Sec 80C (up to Rs 1.5 lakh)	Tax benefits on premium paid, and annuity income (on withdrawal)
Flexibility	Tier-I (Retirement A/c) has limited pre-retirement withdrawals; Tier-II (Investment A/c) allows 100% withdrawal anytime but without tax benefits	Limited withdrawal options, generally allowed after retirement	Partial withdrawals allowed after the 7th year	Varies; some policies offer flexibility in premium payment, term, etc.
Lock-in Period	Tier-I has restrictions on withdrawals until retirement or 3 years whichever is early; Tier-II offers more flexibility but without tax benefits	Generally until retirement; partial withdrawals are allowed under specific circumstances	15-year lock-in; partial withdrawals permitted from the 7th year	Varies by policy and provider, typically until maturity
Unique Features	Government-regulated, multiple investment options, choice of fund managers, portability across jobs and cities	Employer-driven, backed by the government, includes employer and employee contributions	Government-backed, fixed interest rates, can be extended in blocks of 5 years	Customisable plans, additional benefits like riders (health, disability, etc.)
Investment Options	Equity, G-Sec, Corporate Bonds, AIFs; choice of fund managers (10 PFMs) and asset allocation ZERO Capital gain tax on the returns or switch of funds.	Predominantly fixed-income instruments like bonds, government securities	Government securities, fixed interest rates	Wide array including equities, debt, hybrid funds, etc.

NPS Return Comparison Among Fund Managers

Fund Manager	Fund Name	1-Year Returns	3-Year Returns	5-Year Returns	Inception Returns
Kotak Mahindra Pension Fund	Tier I - Equity Scheme	12.51%	13.79%	17.17%	11.47%
	Tier I - Corporate Bonds Scheme	2.11%	8.19%	10.25%	10.24%
	Tier I - Government Bonds	-1.77%	7.31%	9.58%	8.10%
	Tier II - Equity Scheme	12.45%	13.72%	16.95%	10.72%
	Tier II - Corporate Bonds Scheme	1.64%	7.90%	9.91%	9.02%
	Tier II - Government Bonds	-1.60%	7.30%	9.64%	7.91%
HDFC Pension Management	Tier I - Equity Scheme	17.96%%	15.68%	18.22%	17.45%
	Tier I - Corporate Bonds Scheme	2.14%	8.04%	9.88%	9.87%
	Tier I - Government Bonds	-1.13%	7.13%	9.43%	8.90%
	Tier II - Equity Scheme	17.97%	15.88%	14.22%	14.14%
	Tier II - Corporate Bonds Scheme	2.35%	8.12%	8.63%	8.64%
	Tier II - Government Bonds	-1.21%	7.08%	9.50%	9.34%
ICICI Pru Pension Fund	Tier I - Equity Scheme	17.90%	14.25%	17.72%	12.69%
	Tier I - Corporate Bonds Scheme	2.38%	8.20%	10.40%	10.31%
	Tier I - Government Bonds	-0.93%	7.27%	9.80%	8.25%
	Tier II - Equity Scheme	17.97%	14.25%	17.67%	10.54%
	Tier II - Corporate Bonds Scheme	2.18%	8.08%	10.25%	10.14%
	Tier II - Government Bonds	-0.90%	7.28%	9.79%	8.33%
LIC Pension Fund	Tier I - Equity Scheme	14.83%	13.15%	14.52%	14.24%
	Tier I - Corporate Bonds Scheme	1.16%	7.55%	9.55%	9.67%
	Tier I - Government Bonds	-0.77%	8.01%	10.26%	10.05%
	Tier II - Equity Scheme	13.80%	12.72%	10.46%	10.39%
	Tier II - Corporate Bonds Scheme	0.75%	7.57%	8.40%	8.36%
	Tier II - Government Bonds	0.00%	7.95%	10.32%	10.25%