Fixed Deposit (FD) Vs National Pension Scheme (NPS)

Planning your investments early is a smart move for a secure future. The National Pension Scheme (NPS) and Fixed Deposits (FDs) are popular options for growing your savings. 

 

FDs are a low-risk savings option where you can earn a fixed interest over time, making them a safe choice for conservative investors. NPS is a government-backed pension plan designed to help you save for retirement. Both options allow you to invest long-term and build a corpus for future needs.

By understanding all about NPS vs FD, you can choose the one that fits your needs best.

An FD is a type of investment where you deposit a lump sum amount with a bank for a fixed period. The amount you invest earns interest at a set rate determined when you open the account. Depending on your preference, you can receive the interest earned on your FD monthly, quarterly, half-yearly, or annually.

 

There are several benefits to investing in FDs, including:

• Assured Return

FDs offer a guaranteed return as the returns do not fluctuate based on market fluctuations. Your capital is safe, and the interest you earn is usually higher than what you would get from a savings account.

• Flexible Tenure and Renewal

You can choose an FD term that suits you, from as short as one week to as long as 10 years. When your FD matures, you can also choose to renew it.

• Tax Deduction

The interest you earn on your FD is subject to tax under the Income Tax Act of 1961. When you file your tax return, you must include this income in the 'other income sources' section.

• Low Minimum Investment

FDs are a great choice if you are starting to invest but do not have a large amount to commit. You can begin with a small sum, making them accessible to everyone.

• Higher Rates for Senior Citizens

If you are a senior citizen, you can benefit from higher interest rates, helping you maximise your savings for a comfortable retirement.

 

Here are some types of FDs you can invest in:

• Standard Fixed Deposits

These are traditional FDs where you invest a set amount for a fixed period, ranging from 7 days to 10 years. The interest rate depends on the term length and the financial institution.

• Tax-Saving Fixed Deposit

These FDs have a 5-year maturity period and allow you to claim tax deductions of up to ₹1.5 Lakhs per year under section 80C of the Income Tax Act.

• Senior Citizen Fixed Deposits

Banks and NBFCs offer higher interest rates on FDs for people over 60 years of age, along with additional tax benefits.

• Recurring Deposit

In this type of FD, you invest a fixed amount monthly or quarterly. The interest is calculated on the total deposit over the term, and you receive both the principal and interest at the end.

• Flexi Fixed Deposit

This type is linked to your savings account. You can set up automatic transfers of any amount above a set balance into an FD through the auto sweep-in feature.

NPS is a government initiative in India designed to provide retirement benefits to all citizens. Under NPS, contributions are collected into a pension fund and managed by professional fund managers regulated by the Pension Fund Regulatory and Development Authority (PFRDA). 

 

The fund is invested in various investment options. The NPS contributions grow over time and accumulate until retirement. Here are the key benefits of NPS:

• Returns

A portion of the NPS is invested in equities. Therefore, it tends to offer higher potential returns than traditional tax-saving investments like the PPF. The NPS interest rate is linked to market performance.

• Regulated by PFRDA

NPS is regulated by the PFRDA, ensuring transparent investment rules, regular performance reviews, and monitoring of fund managers by the NPS Trust.

• Risk Assessment

Currently, the equity exposure in NPS is capped between 50% and 75%. For government employees, the cap is set at 50%.

• Flexibility

NPS offers flexibility in contributions. You can contribute to the NPS fund at any time during the financial year and adjust the number of contributions as needed.

 

NPS offers the following two types of accounts:

• Tier 1

This is a mandatory retirement account with attractive tax benefits. It is specifically intended for long-term retirement savings, helping you build a secure future.

• Tier 2

This is a voluntary account that gives you more flexibility to withdraw your money whenever you need it. While it offers flexibility, it does not provide the same tax advantages as Tier 1.

Both these investment instruments have different features while catering to similar long-term financial needs. Check the table for a detailed comparison between NPS and fixed deposits:

Note: The terms may vary based on policy changes made by the issuers. Check the latest terms before investing in a scheme.

There is no standard choice when comparing NPS vs fixed deposit as it depends on your financial goals. If you wish to build a corpus but are a risk-averse investor, FDs could be an ideal investment option.

 

Alternatively, if you want to build a larger retirement corpus and earn higher returns through market-linked investment, NPS may be the better fit. For tax benefits, you can invest a large corpus at once into a tax-saving FD. 

 

To calculate the interest you can earn, the FD monthly interest calculator is an efficient online tool. With it, you can plan and invest efficiently. You can access this tool as well as compare FD schemes from different FD issuers on Bajaj Markets.

Both FD and NPS have their own advantages, depending on what you want to achieve. FDs are a safe option with fixed returns, making them a good choice for short as well as long-term savings. 

 

NPS, however, is a long-term investment designed to help you save for retirement, offering returns linked to the market and tax benefits. Which is right for you depends on your financial goals, how much risk you are willing to take, and the period you wish to invest.