Last Updated on 06/12/2020 by Deepak Singla
As much as safe investment options sound appropriate in the post-pandemic era, the focus should always be on making substantial gains, whenever possible. Moreover, an investment plan must strike the perfect balance between the long and short term financial goals without compromising either. This is why, if you were to compare between a Fixed Deposit fund and a National Pension Scheme, it is always advisable to stick to the former.
How does a Fixed Deposit work?
For starters, it is important to note that FDs are extremely safe forms of investment with a compounding power if approached judiciously. Moreover, different banks and lenders offer fixed deposit schemes with varied interest rates and, therefore, you can always compare before selecting a fixed deposit scheme.
Contrary to popular opinion, extensive research can help you identify schemes with exceptional FD interest rates. CRISIL-rated FDs can even offer interest rates amount to 8.7 percent per annum, which is an excellent mark for a safe and secure investment.
However, it is the lock-in flexibility that makes FDs extremely productive. While you can even opt for a smallish 6-month or 3-year fixed deposit plan, tax-saving plans come with a minimum lock-in period of 5 years. Besides, if you want compounding benefits, you can always re-fix the same upon maturity.
Why are FDs better than NPS?
Funds listed under the National Pension Scheme primarily target your retirement corpus. This means, any investment you make, you end up preparing for the post-retirement life. A fixed deposit scheme, however, prepares you for any given situation, with reliance on short and mid-term financial well-being.
NPS policies lock up funds for almost 30 years from the date of purchase. However, with the annuity income being taxable, even some of the long-term benefits of the concerned funds are defeated. Even though the FD corpus is taxable upon maturity, you can always find a workaround to save the TDS deducted on the interest. Moreover, as the TDS is deducted every year, you need not worry about lump-sum deductions upon maturity.
Restrictions of NPS Funds
Despite the long-term nature of an NPS fund, only 60 percent of the corpus is completely tax-free, and you must invest the remaining 40 percent in an annuity plan, where the income is as good as taxable. Most importantly, investments accrued under the NPS plan aren’t immune to inflation indexation either.
Therefore, FDs are better choices as NPS has a pretty confusing profit to account for. Moreover, even if you plan on restructuring withdrawals to suit your financial stead, the 40 percent annuity limit hinders the flexibility. Although some might argue that annuity helps maintain a steady income stream throughout life, the interest rates aren’t competitive enough to tackle inflation.
Fixed Deposit for Retirement
On the contrary, FDs are also better choices for creating a post-retirement corpus as senior citizens end up getting better FD interest rates. Besides, seniors can use the money as desired upon maturity.
Despite NPS being a great post-retirement fund, you should choose an FD over the same to amplify profits and enjoy the perks of flexible and unrestrictive withdrawals, precisely to tackle sudden financial emergencies.