National Pension System (NPS) Returns: A Complete Guide

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The National Pension System (NPS) is a preferred investment tool for your financial future. It is backed by the government and helps with retirement savings. NPS returns are generated through four asset classes- Equity (E) for high growth, Corporate Bonds (C) for stable returns, Government Bonds (G) for security, and Alternative Assets (A) for diversification.

NPS scheme returns: Overview

All the contributions made in the NPS account get allocated to four asset classes, which are:

• Alternative Assets
• Equity
• Government Bonds
• Corporate Bonds

The chosen asset allocation decides your NPS returns as it impacts the overall gains. Since NPS returns are market-linked, investing in equities and other assets can influence growth. It is recommended to start early as it maximises your retirement corpus and pension, making careful asset selection crucial for long-term financial security.

What are the Returns in Tier I and Tier II NPS Accounts?

In this section, you will gain detailed information about the returns on the Tier 1 and Tier 2 accounts of NPS. Here the returns are detailed for both accounts separately:

1. NPS Tier 1 Returns

This is the main account where people, salaried or self-employed, contribute funds for retirement. In this account, you cannot withdraw funds till you are 60 years old.

Through this account, you can contribute to different asset classes like government securities, corporate bonds, and equity. The Tier I account NPS returns rely heavily on how well all these investments perform.

However, Pension Funds offer a return of 7.91% on corporate bonds, 9.40% on government bonds, 8.55% on alternative assets and 32.96% on equity. All these returns are for the first year.

2. NPS Tier 2 Returns

Under NPS, this is an optional account slightly different from the Tier I account. You can only contribute to this account if you have the Tier I NPS account. It's similar to a mutual fund and has no lock-in duration.

In other words, you can take out funds from this account whenever required, but it will not offer you tax-related advantages. Just like the Tier I account, the returns on this NPS account will depend on how well all the asset classes are performing.

Pension Funds will provide you with a 32.98% return on equity, 7.84% on corporate bonds, and 9.24% on government bonds. All these are Year 1 returns on the Tier II NPS account.

NPS Returns Rate for Tier I and Tier II Account

NPS offers attractive returns, with rates depending on the account type and investment options.

1. Since Tier 1 accounts invest their money in a combination of corporate debt, government bonds, and equities, the returns are assured. Returns from Tier 1 accounts range from 9% to 12%, however, this may vary according to the state of the market.

2. Returns differ for Tier 2 accounts depending on the individual's investing selections because Tier 2 accounts have a withdrawal option.

Long-term capital growth is provided by both Tier 1 and Tier 2 NPS Accounts, which are subject to market fluctuations. 

Understanding the Tax on the NPS Returns

NPS scheme allows tax deductions for contributors under Section 80CCD(1). In this regime, salaried employees can claim up to 10% of their salary (Basic + DA), whereas self-employed individuals can claim up to 20% of their gross income, both within the Rs. 1.5 Lakh limit under section 80CCE.

Under Section 80CCD(2), you get to avail extra deductions for employer contributions. For instance, government employees can claim up to 14% of their salary, while private-sector employees can claim 10% (old regime) or 14% (new regime). This deduction is over and above the Rs. 1.5 lakh limit under Section 80CCE and does not apply to self-employed individuals.

Now, let's take a look at a small example:

Consider the overall corpus as Rs. 20,00,000 when you turn 60. You can take out Rs. 12,00,000 as a SWP or lump sum. You can invest the remaining Rs. 8,00,000 in the annuity plan to generate the pension income.

Remember, all the annuity payouts will be added to the income and taxed based on the slab rate.

How Do You Open an NPS Account at ICICI Bank?

Open NPS Account with iMobile App:

To open your NPS account with ICICI Bank, follow the steps below:

• Log in to the ICICI Bank iMobile app.
• Once logged in, Navigate to the "Invest" section.
• Select the ‘NPS’ option.
• Fill in all the required details such as your investment amount, personal information, and nominee details.
• After verifying the information, securely submit your application through the app.

Contributing to Your NPS Account via Internet Banking

• Log in to your Internet Banking account using your credentials.

• Find the section “Investments and Insurance”.

• Next, click “National Pension System”.

• Fill in your investment amount, personal information, and nominee details.

• Next, upload your photo and signature.

• Confirm the details and click “Submit”.

To avoid account freezing, your first contribution to the NPS account must be made online within 45 days of PRAN generation.

It's crucial to make your first contribution online within 45 days of PRAN generation to prevent your account from being frozen, ensuring a seamless initiation of your NPS investment with ICICI Bank.

Conclusion

The National Pension System (NPS) is a tax-friendly investment option ideal for all working professionals. You can contribute funds to both Tier I and Tier II accounts to ensure financial security during your retirement years and get attractive market linked returns. Well-known and reputed banks, such as ICICI Bank, offer the NPS account option to all their customers. They also provide excellent features like; Real time portfolio tracking, Open NPS in just 1 minute. One-click contribution and download statement anytime. If you are considering the NPS, it is advisable to consult a banking professional for more information.

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