NPS Vs. FD: Comparative Analysis For Better Returns!
Dedicating a part of the income to retirement savings from the early career years can be a fruitful habit for an individual. Retirement is a tough period with increases in costs, dependence and less-active life. Financial security becomes crucial in such periods. Instruments like the National Pension Scheme (NPS) or Fixed Deposits (FDs) can provide this security. However, due to some overlapping characteristics of this scheme, investors may get confused regarding selecting the suitable option between NPS vs FD. Let us analyse these instruments comparatively and understand their suitability.
What Is A Fixed Deposit?
In a Fixed Deposit, you put a lump sum amount in your bank or in a corporate fixed deposit for a fixed tenure at an agreed rate of interest. It started as a term deposit account in the banks but has evolved significantly over the years. These days, financial institutions, companies, banks and Non-Banking Financial Companies (NBFCs) provide this facility. Investors put a lump sum corpus in this account, and it matures after the prescribed period. The period can be a minimum of 7 days. Moreover, investors earn the prescribed interest rate over this period, which is usually calculated with a compounding method.
There is also a facility to withdraw the investments before maturity in fixed deposits. However, some charge is levied upon in this transaction. Investors also lose interest for the remaining period of the year. Individuals can deposit in FDs. For minor people, their parents or guardians can invest in FDs.
Fixed deposits are not investing in any market instruments. Therefore, its returns are not market-linked. fixed. FDs in commercial, small-finance or cooperative banks are protected by Deposit Insurance and Credit Guarantee Corporation (DICGC). In case of default of issuing authority, it can help depositors get up to INR 5 lakhs1.
What Is The National Pension Scheme (NPS)?
National Pension Scheme (NPS) is a unique pension plan created by the Pension Fund Regulatory Authority of India (PFRDA). It is a voluntary allocation for generating a fixed pension after certain years. It is a unique investment option in India that provides market-linked returns in a government-supported scheme.
Due to the nature of the pension plan, the contribution can be in three forms:
- Employer-employee contribution (compulsory for government employees)
- Self contribution
Any individual aged between 18-70 years can invest in this scheme. Investors can invest in two types of NPS plans as follows:
- Tier 1: Regular plan.
- Tier 2: Additional plan with more flexibility in withdrawals, minimum subscription and contribution.
For All Citizens Model | Tier I | Tier II |
Minimum Contribution at the time of account opening | INR 500 | INR 1,000 |
Minimum amount per contribution | INR 500 | INR 250 |
Minimum total contribution in the year | INR 6,000 | INR 2,000 |
Minimum frequency of contributions | 1 per year | 1 per year |
Source: National Pension Scheme2
Under this national pension system, the contribution collected from the investors is invested in different assets like equity, bonds, alternative investments, and more. There are different types of funds based on the category of investment, age, allocation and management. These funds can then be managed by any of the 8 pension fund managers prescribed by the PFRDA.
NPS is one of the best tax-saving investments that allows investors to claim a deduction3 under sections 80CCD(1) and 80CCD(1B). The tier 1 plan deduction can be up to INR 2 lakhs. Claiming this deduction can help investors save a significant chunk of their income.
Comparative Analysis: NPS Vs. FDs
Investing in these assets can help investors earn market returns or fixed interest rates. However, this tradeoff can confuse investors in selecting the most suitable option. Here is a comparative analysis of fixed deposits and NPS, which can help investors understand the nature and suitability of these assets.
Particulars | National Pension Scheme | Fixed Deposits |
Returns | NPS will generate market-linked returns from its investment in equities, corporate bonds, government securities and alternative investments. | Due to no market exposure, the returns can be comparatively low. However, these are highly stable and regular in nature. |
Risks | Market risk and withdrawal conditions with a lock-in period are some of the most significant risks lurking over NPS. | The low FD interest rates may not meet inflation demands. Moreover, tax implications on returns can be high. |
Tenure | Investors can be aged 18-70. Post 60 years amount can be withdrawn in a lump sum or annuity. Investments of non-government sector employees are locked for 5 years. | Minimum 7 days4 for investment less than INR 15 lakhs. Above the limit, the minimum tenure is 15 days. Further, it can span up to 10 years5. |
Tax implications | Deduction of 10% of salary or 20% of income (self-employed) up to INR 1.5 lakhs. Additional deduction up to INR 50,000. | Other than a 5-year tax-saving FD6 (which provides deduction under Section 80C), all other FD incomes are taxed at regular rates as per income tax norms. |
Liquidity | Other than 5-year lock-in for non-government employees, withdrawal is easy. Investors can withdraw lump sum or start annuity plans after 60 years. | The lock-in period in fixed deposits can change based on the entity. Guaranteed returns and facility for premature withdrawal make it potentially liquid. |
Premature withdrawal | Full lumpsum withdrawal7 up to INR 2.5 lakhs (before attaining 60 years) is allowed. Non-government employees must have completed 5 years before this withdrawal. | Early withdrawals in fixed deposits are allowed with some % penalty on the corpus. Investors should check the lock-in period conditions before investing. |
Understanding the differences between NPS and FDs can help you choose the right investment based on your risk appetite and financial goals. However, these are not the only investment options available. If you’re looking for alternative fixed-income investments with competitive returns, explore Grip’s range of investment opportunities.
Which Is Better: NPS Or FD?
The following situations can help investors decide about their investment in NPS vs FD:
- NPS: Investors willing to earn market returns in comparatively short-term investment may find NPS suitable. Moreover, it also allows tax benefits for the investors. Overall. NPS investment can be suitable for investors with a higher risk appetite.
- FDs: These are popular for their guaranteed returns. However, these returns may not beat the inflation effect. Investors with lower risk appetite and willing long-term investment may find FDs suitable.
- Combination: Investors with a neutral risk nature can combine these investment products in their portfolios. It will diversify their returns and risks throughout the investments. Moreover, the objective of retirement savings can be fulfilled with annuity or lump sum benefits from these investments.
Conclusion
Long-term investments can be a crucial decision for investors due to varied factors affecting these decisions. Investment options in India, like the National Pension Scheme and fixed deposits, can help investors in this process. However, investors can understand its differences and decide its suitability. NPS is a market-linked investment with government support and potential tax benefits. While FDs generate guaranteed returns and can help earn long-term returns. Investors can select between these investments or use them both to diversify their portfolios.
Modern debt instruments like Securitised Debt Instruments (SDIs) can be a potential option for diversification. Log in to Grip Invest and start your investment journey today!
Frequently Asked Questions On NPS Vs FD
1. Which investment offers better returns: NPS or FDs?
NPS can offer higher returns than FDs as it invests in different market-linked securities. However, due to these characteristics, these returns may not be stable. Investors willing to earn stable returns may find FD suitable.
2. Can I withdraw money from NPS or FD before maturity?
Yes, investors can withdraw early from NPS and FD. In FDs, premature withdrawal would deduct the operation charges and interest for the remaining tenure. In NPS, an amount can be withdrawn after a lock-in period.
3. Can NRIs invest in NPS or FDs in India?
Yes, there is a separate fixed deposit account for NRIs. Also, they can invest in NPS through NRE or NRO accounts.
References:
1. Deposit Insurance And Credit Guarantee Corporation, accessed from: https://www.dicgc.org.in/fd_a-guidetodepositinsurance.html
2. Pension Fund Regulatory and Development Authority, accessed from: https://www.pfrda.org.in/writereaddata/links/faqsallcitizensmodelbf322a1a-be90-4eba-9356-4258f4bdfafd.pdf
3. Protean, accessed from: https://proteantech.in/articles/NPS-Tax-Benefits/
4. Reserve Bank of India, accessed from: https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=1066#12
5. Axis Bank, accessed from: https://www.axisbank.com/fixed-deposit-interest-rate
6. Income Tax Department, Government of India, accessed from: https://incometaxindia.gov.in/Pages/tools/deduction-under-section-80c.aspx
7. NPS Trust, accessed from: https://npstrust.org.in/pre-mature-exit
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