Click Here for old Websitenext_arrow
close_icon
Home / Glossary / Saving Schemes / NPS Returns

Introduction

The National Pension Scheme (NPS) is a government-sponsored retirement savings scheme in India designed to provide a steady income post-retirement. NPS returns are an important aspect of this scheme, as they determine the growth of the corpus over time. This comprehensive guide delves into various facets of NPS returns, helping you understand how they work, how to calculate them, and the benefits of investing in NPS.

What is NPS?

The National Pension Scheme is a voluntary, defined contribution retirement savings plan introduced by the Government of India. It aims to provide old-age security to all citizens, especially those working in the private sector and self-employed individuals. 

Types of NPS Accounts

NPS offers two types of accounts: Tier 1 and Tier 2.

1. Tier 1 Account: This is a mandatory account for all NPS subscribers. It has restrictions on withdrawals and is meant primarily for retirement savings.

2. Tier 2 Account: This is a voluntary account that acts as a savings account. It allows more flexibility in terms of withdrawals and investments.

What Do You Mean by NPS Returns?

NPS returns are the earnings generated from the contributions made to the NPS account. These returns depend on the performance of the underlying assets in which the contributions are invested. The NPS offers a choice of Pension Fund Managers (PFMs) and asset classes, including equity, corporate bonds, and government securities.

Asset Classes in NPS

1. Equity (E): Investments in equity markets. This class has the potential for high returns but comes with higher risk.

2. Corporate Bonds (C): Investments in corporate debt. This class offers moderate returns with moderate risk.

3. Government Securities (G): Investments in government bonds. This class is the safest with relatively lower returns.

4. Alternative Investment Funds (A): Investments in asset classes like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

NPS Fund Managers

Subscribers can choose from several Pension Fund Managers (PFMs) who manage the investments of the Pension Fund Management Limited. The performance of these managers directly impacts the NPS returns. The available PFMs include:

  • SBI Pension Funds
  • LIC Pension Fund
  • UTI Retirement Solutions Ltd.
  • HDFC Pension Management
  • ICICI Prudential Pension Fund
  • Kotak Mahindra Pension Fund
  • Aditya Birla Sun Life Pension Management Ltd
  • Tata Pension Management Pvt. Ltd.
  • Max Life Pension Fund Management Ltd.

Historical Performance

National Pension Scheme returns have historically been competitive compared to other retirement savings options. However, it is essential to remember that past performance does not guarantee future returns.

Also Read: Atal Pension Yojana (APY)

NPS Return Calculators

An NPS return calculator is a tool that helps subscribers estimate the NPS returns percentage and the future value of their NPS corpus based on various assumptions, such as the amount of contribution, the expected rate of return, and the investment duration. These calculators are available online and provide a clear picture of how your investments may grow over time.

How to Use an NPS Return Calculator?

1. Input the Contribution Amount: Enter the monthly or annual contribution you plan to make.

2. Select the Investment Period: Choose the number of years you intend to stay invested in the NPS.

3. Expected Rate of Return: Provide an estimated rate of return based on historical performance or your expectations.

4. Calculate: The calculator will provide an estimated value of your NPS corpus at retirement.

Example Calculation

Assume you contribute INR 5,000 monthly to your NPS Tier 1 account for 25 years, with an expected average return of 10% per annum. Using the NPS return calculator, you can estimate the maturity amount and the total returns from the NPS scheme to be gained over this period.

NPS Returns: Tier I vs. Tier II

Tier I Returns

NPS Tier 1 returns are typically higher due to the long-term investment horizon and the power of compounding. The investment in Tier 1 is locked until retirement, which helps in achieving better returns over time.

Tier II Returns

NPS Tier 2 returns might be lower compared to Tier 1 as this account is more flexible and allows for frequent withdrawals. However, the returns are still competitive as they are managed by professional fund managers.

Factors Affecting NPS Returns

The National Pension Scheme (NPS) is a government-sponsored retirement savings scheme that offers tax benefits and the potential for market-linked returns. The returns on NPS investments are influenced by several factors:

1. Pension Fund Management Limited:

The performance of NPS returns heavily depends on the fund manager’s expertise. Different pension fund managers like LIC Pension Fund, Aditya Birla Sun Life Pension Management, Max Life Pension Fund Management, and Tata Pension Management Pvt have varied investment strategies and track records.

2. Asset Allocation:

NPS offers multiple asset classes: equities (E), government bonds (G), and corporate bonds (C). The chosen asset allocation impacts returns significantly, with equities typically offering higher but more volatile returns.

3. Market Conditions:

The overall economic environment and market performance directly influence the returns on equity and debt investments. Factors like interest rates, inflation, and corporate earnings play crucial roles.

4. Investment Horizon:

The duration of investment affects compounding benefits. Longer investment horizons generally result in better returns due to the power of compounding and the ability to ride out market fluctuations.

5. Fund Performance:

The historical performance of specific pension fund management companies, such as Aditya Birla Sun Life Pension Management, LIC Pension Fund, and Tata Pension Management Pvt, can provide insights into potential returns. Consistent past performance often indicates effective management strategies.

6. Expense Ratio:

Lower expense ratios can lead to higher net returns. It is essential to compare the expense ratios of different pension fund managers like Max Life Pension Fund Management and others to understand their impact on overall returns.

7. Regulatory Changes:

Changes in government policies, regulations, and tax laws can impact the returns on NPS investments. Staying informed about such changes is crucial for maximizing benefits.

Also Read: Swavalamban Pension Yojana

Benefits of Investing in NPS

The National Pension Scheme (NPS) offers several advantages, making it an attractive investment option for retirement planning:

1. Tax Benefits:

Investments in NPS qualify for tax deductions under Section 80C and 80CCD(1B) of the Income Tax Act. Additional deductions up to ₹50,000 under Section 80CCD(1B) make NPS a tax-efficient investment.

2. Diverse Investment Choices:

NPS offers a variety of investment options, with reputable pension fund managers like LIC Pension Fund, Aditya Birla Sun Life Pension Management, Max Life Pension Fund Management, and Tata Pension Management Pvt managing them. This diversity enables investors to choose funds based on their risk appetite and financial goals.

3. Market-linked Returns:

Unlike traditional fixed-income instruments, NPS offers market-linked returns, which have the potential to generate higher long-term returns due to exposure to equities and bonds.

4. Professional Fund Management:

NPS funds are managed by experienced professionals from leading pension fund management companies, ensuring prudent investment decisions and efficient portfolio management.

5. Flexibility in Asset Allocation:

NPS allows investors to choose their preferred asset allocation mix among equities, government bonds, and corporate bonds, or opt for an auto-choice lifecycle fund that adjusts the allocation based on the investor’s age.

6. Portability:

NPS accounts are portable across jobs and locations, ensuring continuity of the retirement corpus regardless of changes in employment or residence.

7. Low Cost:

NPS stands out for its low-cost structure compared to other investment options, which enhances net returns by minimizing expenses.

8. Regular Contributions:

The disciplined approach of regular contributions helps in systematic wealth accumulation over the long term, ensuring a substantial retirement corpus.

9. Annuity Option:

At maturity, a portion of the NPS corpus can be converted into a regular pension through annuity plans offered by life insurance companies, providing a steady income stream post-retirement.

Investing in the National Pension Scheme through reputable pension fund management companies like LIC Pension Fund, Aditya Birla Sun Life Pension Management, Max Life Pension Fund Management, and Tata Pension Management Pvt will significantly enhance your retirement savings and ensure financial security during your golden years.

Conclusion

The National Pension Scheme is a robust retirement savings option offering competitive returns, tax benefits, and flexibility. Understanding NPS returns and using tools like NPS return calculators can help investors plan better for their retirement.

Whether you choose Tier 1 or Tier 2, the scheme offers a structured approach to building a substantial retirement corpus, ensuring financial security during your golden years. If you are looking forward to investing in the National Pension Scheme, funds like LIC Pension Fund, Aditya Birla Sun Life Pension Management, Max Life Pension Fund Management, and Tata Pension Management Pvt should be the most viable options.

Looking for other investment options?

Get started with Mutual Funds by opening a demat account with Jainam.

Frequently Asked Questions

What is the National Pension Scheme (NPS)?

NPS is a government-sponsored retirement savings scheme in India designed to provide a steady income post-retirement.

What are the types of NPS accounts?

NPS offers two types of accounts: Tier 1 (mandatory for retirement savings) and Tier 2 (voluntary with flexible withdrawals).

How are NPS returns calculated?

NPS returns depend on the performance of the underlying assets (equity, corporate bonds, government securities) managed by chosen fund managers.

What factors affect NPS returns?

Market performance, choice of fund manager, asset allocation, and investment horizon affect NPS returns.

What are the benefits of investing in NPS?

Tax benefits, flexibility in fund management, low cost, transparency, and portability are key benefits of NPS.

How can I use an NPS return calculator?

Enter your contribution amount, investment period, and expected rate of return in an online NPS return calculator to estimate the future value of your NPS corpus.

What is the difference between Tier 1 and Tier 2 NPS returns?

Tier 1 returns are typically higher due to the long-term investment horizon, while Tier 2 returns are more flexible but might be lower due to frequent withdrawals.

Are NPS returns guaranteed?

No, NPS returns are subject to market risks and are not guaranteed, but professional fund management aims to maximize returns.

Explore our feature-rich web trading platform

Get the link to download the App

trading_platform