Fixed Deposit vs National Pension Scheme (FD vs NPS)
A fixed deposit, popularly known as FD, is a risk free investment tool which provides guaranteed returns to the investors. The money which is being deposited by the investors in an FD is locked for a fixed period of time which ranges from seven days to ten years.
The interest rates of a fixed deposit are fixed while opening the account and remain the same over the investment period. Having said that, the interest rates applicable on an FD will differ according to the duration of the investment. The bank will pay the principal amount as well as the compounded interest on the sum to the investor at the end of the tenure of investment.
Pension scheme, also known as National Pension Scheme (NPS) is a government sponsored pension scheme which has been introduced in the year 2004.
The eligibility window for the programme, which was initially solely open to central government employees, was widened in 2009 to include workers in the public, private, and unorganised sectors.
But the scheme cannot be opted by the ones who are in Amed Forces. Under this scheme, you need to invest a small portion of your salary every month in order to ensure that you receive a steady pension during your retirement years.
The Pension Fund Regulatory and Development Authority (PFRDA), which oversees and administers the NPS plan, outlines investments that are guaranteed.
How Does NPS Work?
The number of contributions made by an individual in an NPS scheme is pooled together and invested in market-linked assets such as debt funds, equities, corporate bonds, and government bonds.
Hence, the returns that you will be getting from this scheme is based on the performance of such assets. According to the NPS guidelines, you need to invest a minimum of Rs.6,000 per year until your retirement which is capped at 60 years.
Once you are retired, you can withdraw up to 60% of the amount deposited and the remaining amount can be used to buy an annuity to ensure a regular flow of pension.
FD vs Pension Scheme: Features and Benefits
The following are features and benefits of FD and pension scheme:
- Flexibility - As we have already mentioned above, the minimum annual contribution to your NPS account should be Rs.6,000, there is no maximum contribution limit. Apart from this, you can also choose between Active Choice and Auto Choice options in order to manage your funds. In Auto Choice, a fund manager is responsible for handling your investment portfolio whereas Active Choice provides you with the flexibility in managing the account. On the other hand, in FD, there is a fixed tenure set by the bank or a financial institution and you need to deposit a lump sum amount while opening the FD account.
- Liquidity and Withdrawals - According to the National Pension Scheme, the scheme provides two different types of accounts, namely the default Tier I account and voluntary Tier II account. You can open Tier II account only if you have an existing Tier I account. Tier I accounts only allow withdrawals after the first three years, however withdrawals from Tier II accounts are not restricted. The withdrawal limit for these accounts is set and investors can withdraw only 25% of the total amount contributed with a maximum of three withdrawal limit over the tenure. FDs, on the other hand come with a pre decided lock in period. Money can be taken out of the account, but only after paying a penalty in the form of a lower interest rate.
- Market Linked Returns - NPS is a market linked pension scheme which provides returns to the investors by investing in different types of assets. Hence, there is risk associated with this types of investment. However, the returns that investors will be getting are higher as compared to the conventional tax savings tools. Additionally, the NPS plan permits a maximum investment of 50% in stocks, allowing the investor flexible control over the investment. The investment is more or less protected from market volatility due to this cap's good risk-return ratio. In a traditional FD, the investors will be getting guaranteed returns although the amount of returns will be lower than the returns received from NPS.
Comparison of FD vs Pension Scheme
The following table compares about the FD and Pension Scheme:
Feature | FD | National Pension Scheme |
Tenure | It provides an option to choose tenure between seven days and ten years | Until retirement |
Safety | FD investment is 100% safe and returns are guaranteed | It provides market linked returns, so risk is involved |
Rate of Interest | From 6.5% and can go up to 7.35% | Based in the performance of the assets |
Returns | Based on the rate of interest | Market linked |
Premature Withdrawal | Allowed but penalty should be paid | Yes, for specific reasons but only after three years of investment |
Tax Benefit | Rs.1.5 lakhs per year | Up to Rs.2 lakhs per year |
Eligibility | All Indian citizens can apply | Indian residents from 18 to 65 years of age except armed forces are eligible |
FAQs on Fixed Deposit vs National Pension Scheme
- How can I open an NPS account?
You can open an NPS account both online and offline. If you want to open an NPS account offline, you should visit the nearest branch of a bank appointed by the PFRDA and submit the duly filled application form along with the required documents and pay the one time registration fee.
- Can I open an FD account online?
Yes, you can definitely open an FD account online by visiting the official website of the particular bank.
- Can I withdraw money from my pension scheme before retirement?
Yes, you can partially withdraw money from a pension scheme before retirement but you need to give a specific reason.
- I am a Non-Resident Indian (NRI). Can I open an NPS account?
No, only Indian citizens are allowed to open an NPS account.
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