Fixed Deposit vs National Pension Scheme: Which Scheme is Better?

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Saving for one’s retirement is a critical financial aim. The greatest strategy to save for retirement is to make tiny but consistent contributions over time. The National Pension System (NPS scheme) and the Public Provident Fund (PPF) are two regularly utilized products for this purpose.

Who is Eligible to Invest?

NPS: When introduced in January 2004, NPS was solely accessible to government workers; however, in May 2009, it was made available to all Indian citizens. People may subscribe to the NPS scheme in one of the three major types. The first is a statutory payment made by government workers, the second by business employees, and the third is a voluntary contribution made by all people. NRIs, too, have the option to invest in NPS.

PPF: All resident Indians are eligible to invest in PPF. The investments are not permitted for non-resident Indians (NRIs).

Age Eligibility

NPS: The minimum age to invest is 18 years old, and the maximum period to enroll is 65 years old.

PPF: There is no age limit for PPF. Minors may invest in PPF with the help of a guardian.

The Nature of the Returns

PPF: A PPF provides you with the highest FD interest rates that may fluctuate every quarter and is determined by a committee based on changes in government securities rates.

NPS: Investors have a variety of investment alternatives, including stock, government securities, and corporate bonds. The return on your NPS scheme investment is not for sure since they are market-linked investments.

PPF Return Rate

PPF is well-known for providing one of the greatest returns among government-backed investment choices. The PPF interest rate may fluctuate quarterly and is determined by a committee based on changes in the rates of government securities during that quarter. For the fiscal quarter ending March 31, 2022, the current PPF interest rate is 7.1% p.a.

NPS: NPS scheme investors, on the other hand, have the option of earning a more significant return by investing in a combination of stocks, corporate bonds, and government securities. The returns are entirely market-driven and are determined by the performance of your fund manager as well as the asset combination you choose.

Investment Period

PPF: A PPF account has a 15-year maturity term. You may increase your PPF investment beyond 15 years in 5-year increments an unlimited number of times.

NPS: As the NPS is a retirement product, the investment period is until the vesting age of 60 years. You may keep your NPS account open until you reach the age of 70.

Payment for Maturity

PPF: After a 15-year term, you get the total investment and accrued return as a lump sum payment.

NPS: When you retire from the NPS, you must invest at least 40% of your accrued corpus in an annuity plan that provides monthly income. You may remove a maximum of 60% of your corpus in a lump amount.

Tax Breaks

Both PPF and NPS provide a tax deduction advantage of Rs. 1.5 lakh every fiscal year.

PPF: The return on your PPF is tax-free. However, you may only invest up to Rs. 1.5 lakh in each fiscal year.

NPS: In addition to the Rs. 1.5 lakh investment allowed under section 80CCD1, NPS allows you to deduct an extra Rs. 50,000 under section 80CCD (1B). So, if you invest this money in NPS, you may effectively earn a deduction of Rs. 2 lakh every year.

Where should you put your money, NPS or PPF?

Both investment options have distinct advantages and disadvantages that you should consider before purchasing. While PPF provides one of the greatest yields in the fixed income category, stocks are known to give substantially better long-term returns. Looking at the historical returns, one can see that in terms of absolute return, PPF cannot compete with the NPS returns, which have generally been in the double digits.

NPS investments have a significant disadvantage when it comes to maturity since you do not get the total amount as a lump payment and must purchase an annuity with 40% of the corpus. Annuities are notorious for providing poor returns. However, the increased tax savings that NPS might provide can compensate for a lower effective corpus.

If you invest Rs 10,000 per month for 30 years, you may create a corpus of Rs 1.41 crore in PPF assuming an annual rate of return of 8%, whereas an investment in NPS can provide a corpus of Rs 2.06 crore, assuming a compounded annual growth rate of 10%. So, if you are in a higher tax band, NPS provides a way for you to establish a tax-advantaged retirement corpus.

If your retirement goal necessitates a considerably bigger payment, you may utilize PPF for fixed income and NPS for market-linked returns. If you have fewer than 15 years till retirement, PPF may not be a good option for you, but NPS may be.

Conclusion

Although the National Pension Scheme is one of the most significant long-term investing possibilities, it is not advised as a short-term investment option. By investing in a Bajaj Finance FD, you may enjoy the best of both worlds since it provides several options for achieving both short-term and long-term objectives. Unlike NPS, the Bajaj Finance FD is likewise free of all market risks and offers assured highest FD interest rates.

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