While choosing between National Pension Scheme (NPS) & fixed deposits, an investor compares the long-term retirement objectives in terms of quicker returns & liquidity. While NPS is renowned as a long-term investment plan, fixed deposits, on the other hand, are often seen as one of the Best Short-Term Investment plans due to the stable & assured returns they offer.
What is NPS?
The National Pension Scheme (NPS) is a voluntary contribution pension scheme designed for employees from public, private, or unorganised sectors. Under this plan, the amount should be invested at regular intervals during employment, some percentage of which can be taken out after retirement. The remaining amount can be received after retirement, just like the monthly pension amount. NPS is a flexible, hassle-free & safe investment plan that allows one to secure a financial future in a planned manner.
What are Fixed Deposits?
A fixed deposit is a type of savings plan issued by financial institutions or banks, where funds are deposited for a certain period of time ranging from a few days to several years. In return, banks pay investors the maturity amount along with a specified interest rate, which is normally higher than that on a savings plan. They are low-risk investments with guaranteed returns.
Features of NPS
Provided below are the features of the National Pension Scheme:
- The National Pension Scheme is governed by the NPS Trust & managed by the Pension Fund Regulatory & Development Authority.
- It offers flexibility in the selection of tenure & amount according to the financial objectives & risk appetite.
- This scheme can be availed by any Indian resident between 18 & 70 years.
- Even in circumstances of a job change or any relocation, the National Pension Scheme Account remains the same.
- It offers low-cost & economical long-term pension plans.
- It provides tax advantages to both self-employed & salaried individuals.
- Get a tax deduction, maximum up to INR 1,50,000 u/s 80CCD (1).
- Get an additional tax deduction maximum of INR 50,000 u/s 80CCD (1B).
- The funds from the superannuation account can be transferred to the National pension scheme account.
Features of Fixed Deposits
Provided below are the features of the fixed deposits:
- This plan offers flexibility in plan duration, ranging from 7 days to 10 years, ensuring the achievement of financial objectives in both short & long-term investment horizons.
- Senior citizen fixed deposits offer competitive interest rates in comparison to regular FDs with an added interest of 0.50% annually. Higher interest rates help reduce the risk with an increase in savings.
- In case of emergencies, senior citizen fixed deposits offer a premature withdrawal, i.e. before maturity. But this option can be availed against penalty charges.
- The fixed deposit can be held as collateral if a loan is availed, where the maximum loan amount is equal to the value of the fixed deposit. The repayment of the loan can be done in fixed instalments, where a fixed deposit is held as collateral until the loan is repaid in full.
- This facility allows for to withdrawal of funds depending on the value of the fixed deposits. This facility does not have a fixed repayment schedule, where interest is charged depending on the amount that is used.
Difference between NPS & Fixed Deposits
Here are the differences between the NPS & fixed deposits:
| Basis of Difference | NPS | Fixed Deposit |
| Returns | This plan offers market-linked returns by investing your funds in equities, government securities, corporate bonds, etc. | These plans are stable & secure, as they are not linked to the market, hence offer low returns. |
| Risks | The associated risks are market volatility & rigid withdrawal conditions. | Fixed deposits offer low interest rates which may not be able to beat the inflation factor. Also, it attracts high tax rates. |
| Tenure | Individuals between the ages of 18 & 70 can invest, & it allows individuals over 60 years of age to withdraw funds in either a lump sum or annuity. | In case the investment amount is less than INR 15 lakhs, the tenure can be a minimum of 7 days. &, in case the investment amount is above INR 15 lakhs, the tenure can be 15 days. It can be up to 10 10-year periods. |
| Tax implications | It allows a tax deduction of 10% of salary or 20% in case of self-employed, maximum up to INR 1.5 lakhs. It also allows an additional tax deduction of up to INR 50,000. | Income received from fixed deposits is taxed at regular income tax rates. Except for 5-year tax savings fixed deposits, which offer a tax deduction u/s 80C of the Income Tax Act, 1961. |
| Liquidity | The withdrawal conditions are quite flexible & easy, except for non-government employees, who have a 5-year lock-in period. It allows easy withdrawal either in a lump sum or annuity after 60 years of age. | It allows the lock-in period to be changed depending on the entity. Offers assured returns & premature withdrawal facility, making them highly liquid. |
| Premature withdrawal | In case of individuals below 60 years of age, it allows withdrawal in a full lump sum of up to INR 2.5 lakhs. The non-government employees have a lock-in period of 5 years to withdraw the funds. | It allows an investor to make a premature withdrawal of funds at some penalty cost. |
Which Plan Best Suits You- NPS or FD?
The selection between the NPS & FD depends on financial objectives, risk tolerance level, & investment horizon.
One should choose NPS if:
- You want to invest in a Long-Term Investment plan.
- You are willing to invest in a market-linked investment plan & its associated risks.
- You are looking for tax benefits u/s 80C & 80CCD (1B).
One should choose a Fixed Deposit if:
- You are looking for assured returns along with safeguarding capital.
- You are a risk-averse individual.
- You are looking to invest in short-to-medium-term financial objectives.
- You are looking for a liquid investment plan with flexible tenure.
Conclusion
While choosing a plan between the two, an investor should look for their financial objectives, risk tolerance level, & investment horizon. Where NPS, on one hand, offer high returns along with taxation advantages being linked to the market, fixed deposits, on the other hand, offer stable & assured returns. Investors with a neutral approach can use a combination of both to diversify the returns & risks involved in their portfolio.
