National Pension Scheme Returns and Taxes Implications: An Easy Guide

Financial planning is important for your future, especially during retirement. Investing in various schemes and assets helps lower risks and get higher returns in your golden years. To access financial stability during retirement, the Government of India launched the National Pension Scheme (NPS). This scheme is open to all working-class employees except those in the armed forces. National Pension Scheme returns are completely tax-free until maturity. 

This scheme allows you to invest in a pension account until you are employed. After retirement, you receive the amount in the form of a monthly pension. It is focused on long-term retirement income and one benefit of it is the tax exemption you enjoy. The returns on the NPS scheme depend on your asset allocation, which can be equity, alternative assets, corporate bonds or government bonds. 

National Pension Scheme Benefits  

Investing in the National Pension Scheme (NPS) allows you to benefit from tax exemptions and access higher returns. The NPS program comes with simple exit rules, too. Read on to understand these and other benefits in detail:

• You can claim a tax deduction for contributions made. Under Section 80CCE of the Income Tax Act, you can claim a tax benefit of up to ₹1.5 Lakhs. An additional deduction of ₹50,000 under Section 80CCD(B) can be claimed. 
• Compared to long-term savings schemes like the Public Provident Fund, the returns from NPS are higher. As a portion of the fund goes to equity, NPS provides excellent returns among other options. You can change the fund manager if you wish to invest in a different portfolio. You can calculate NPS returns using a free online calculator. Also, the risk associated is lower as the equity exposure is capped at up to 75% for all return rates. 
• The exit options and terms for the NPS program are flexible. When you reach the age of 60 years, you can withdraw a lump sum of 60% of the corpus amount. You can also make withdrawals thrice with a minimum gap of 5 years during the investment period. You can use these withdrawn funds for medical emergencies, children’s education or to buy a house. 

Types of NPS Accounts

There are two types of NPS accounts, where a Tier 1 account is the main one and a Tier 2 account is optional. 

• Tier-1 Account

This is the main account where you can invest as a salaried or self-employed individual. As this is the main account, you cannot make withdrawals before attaining 60 years of age. You can contribute to assets like government securities, equity and corporate bonds. 

• Tier-2 Account

This is an optional account that you can contribute to only if you have a Tier-1 account. This account investment is similar to a mutual fund with no lock-in period. You can withdraw funds whenever required and get tax benefits only if you are a government employee. 

NPS Returns for Different Accounts

The returns in the NPS program are excellent based on the investment and account type. You must note that the long-term returns from both accounts vary depending on market fluctuations. 

• NPS Tier-1 Returns

The tier-1 account invests in a mix of asset classes and provides assured returns. The NPS return percentage can range from 9% to 12% based on how well the investments perform. For the first year, the NPS return percentage is up to 9.40% on government bonds, 8.55% on alternative assets, 32.96% on equity and 7.91% on corporate bonds on average. The minimum contribution to this account starts from ₹500. 

• NPS Tier-2 Returns

Depending on our investment selections, Tier-2 provides returns that may differ from Tier-1 account returns. The potential returns can also vary as this account enables withdrawal options without limitations. Similar to Tier-1 accounts, the returns will depend on how well the asset classes perform. For the first year, the NPS tier-2 returns offer 7.84% on corporate bonds, 32.98% on equity and 9.24% on government bonds on average. The minimum contribution to this account starts from ₹1,000. 

Tax on NPS Returns

NPS Tier-1 returns and Tier-2 returns are completely tax-free until maturity. As soon as you turn 60 years, you can withdraw up to 60% of the lump-sum amount, tax-exempt under Section 10(12A). The remaining 40% you can use to buy annuities, which are again tax-free under Section 8CCD(5). 

Also Read: Tax Benefits of NPS

National Pension Scheme Withdrawal or Exit Rules

The exit rules for the NPS program are simple, as you can withdraw upon reaching 60 years, prematurely or upon death. 

• When you attain 60 years, you can use at least 40% annuity to get a regular monthly income and withdraw the remaining 60%. However, you can withdraw 100% of the corpus amount if your amount is equal to or less than ₹5 Lakhs. 
• In case of premature exit, you can use at least 80% of the corpus amount to buy an annuity providing a regular monthly pension. If your amount is less than or equal to ₹2.5 Lakhs, you can opt for a 100% lump-sum withdrawal facility. 
• If you die as a contributor, 100% corpus amount is provided to your heir or the nominee.

Investing early on in NPS can help you build retirement savings with better returns across various asset classes. You can choose between Tier 1 and Tier 2 accounts, but keep in mind that returns depend on market performance and fund management.

If you are looking forward to accessing funds without liquidating your current investments, you can opt for other options. If you invest in mutual funds, you can get access to funds using Fibe Loan Against Mutual funds. 

This loan lets you access up to ₹10 Lakhs instantly while your mutual funds keep growing. You get up to 80% of your fund’s value, quick 10-minute disbursal and pay only interest for what you utilise. Loan against mutual funds with Fibe is a hassle-free way to handle short-term needs without selling your long-term goals. Download the app from the Play Store or App Store to apply now! 

FAQs on National Pension Scheme Returns 

Does the NPS provide inflation-adjusted returns?

Yes. The NPS provides a higher inflation-adjusted return of 9% up to 12% over the long term, compared to other schemes such as PPF and SCSS. 

Can I adjust my NPS contributions to increase potential returns?

Yes, you can adjust your NPS contributions and the asset allocation within the NPS scheme to optimise potential returns based on your risk tolerance. You can invest in a mix of equity, corporate bonds and government securities, which can help you tailor your portfolio according to your retirement goals. Additionally, you can change your pension fund manager if needed.

Can I expect NPS returns to beat inflation in the long run?

Yes. You can expect the NPS returns to beat inflation in the long run, as experts determine a mix of debt and equity chosen ahead of other options can tackle up to 7% inflation growth easily. 

Is NPS better than FD?

NPS programs can offer much higher returns compared to Fixed Deposits (FDs) as they invest in different market-linked equities. However, these returns fluctuate based on market conditions and may not remain stable.