National Pension Scheme (NPS) 

The National Pension System is a voluntary defined contribution pension system in India. Like PPF and EPF, the National Pension System is an EEE instrument in India where the entire corpus escapes tax at maturity, and the whole pension withdrawal amount is tax-free.

With a wide range of investment options in the market, choosing which one works best for your requirements can often be challenging. Out of these, National Pension System and Fixed Deposit are often considered as popular and reliable investment options for different financial goals.

Those looking to choose between the National Pension Scheme (NPS) and Fixed Deposit need to know about the features and benefits of each of these investment options. For the most part, NPS is typically considered an essential investment option for any working professional who wishes to save up for a comfortable post-retirement life.

NPS Interest Rate

Tenor Invest till 65 years
Interest rate 9% - 12% p.a.
Investment amount Starting at Rs. 250
Maturity amount Depends on the initial investment amount

Features and benefits of the National Pension System

Here are the specific features and benefits of investing in the National Pension Scheme:

  • Options for liquidity: With NPS, you can make contributions with two types of accounts - Tier I and Tier II. Each of these offers distinct benefits and can serve a variety of liquidity purposes.
  • The flexibility of investment:  NPS also allows you to choose the amount of control you exercise over your investments. You can select auto-choice to let a fund manager manage your investments or actively select the asset classes in which to direct your investments.
  • Partial withdrawal: While an NPS is geared towards saving money for retirement, you can also withdraw a part of your NPS amount, should there ever be a requirement.
  • Tax benefits: One of the most significant advantages an NPS investment offers is that it allows you to make the most of various tax deductions under the Income Tax Act, 1961.

National Pension Scheme can be a great way to grow your retirement savings, but it may not be very convenient for short-term investments.

Types of NPS Account

There are two types of NPS accounts, Tier I and Tier II. The former is the default account, while the latter is a voluntary addition. The table beneath clarifies the two record types exhaustively.

Particulars NPS Tier-I Account NPS Tier-II Account
Status Default Default
Withdrawals Not permitted Permitted
Tax exemption Up to Rs 2 lakh p.a.(Under 80C and 80CCD) 1.5 lakh for government employees Other employees-None
Minimum NPS contribution Rs 500 or Rs 500 or Rs 1,000 p.a. Rs 250
Maximum NPS contribution No limit No limit

The Tier-I account is compulsory for every individual who selects the NPS scheme. The Central Government representatives need to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

How to open an NPS account

You can now open an NPS account from the comfort of your home. Opening an account online (enps.nsdl.com) is easier than ever, all you need to do is, link your account to your PAN, Aadhaar and mobile number.
You can validate the registration using the OTP sent to your mobile number. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.

How is NPS calculated?

Before investing in NPS, it might be worth exploring how the returns are calculated and what pension amounts you can expect at the end of your tenor. Here is the formula for calculating NPS:
A = P (1 + r/n) ^ nt
Where,
P = Principal
r = rate of interest
n = number of times interest has compounded
t = total tenure

NPS Interest Rate

It is important to note that there is no singular interest rate for NPS. This is because NPS is essentially market-linked, which means the interest rate for its returns depends on the performance of the assets that you invest in. To that end, here are the four types of asset classes in which you can invest with NPS:

Asset Class Asset Type
Class G Government Bonds
Class E Equities
Class C Corporate Bonds
Class A Real Estate Investment Trusts (REITs), Commercial mortgage-backed securities, and alternative investment funds.

How to use NPS withdrawal money?

NPS investments are one of the most recommended modes of investment for people looking to fulfil long-term financial goals. This is because you can only exit an NPS and withdraw the resulting amount after a period of 10 years. NPS withdrawal money can therefore be utilised for looking after your retirement, funding your children’s education or wedding or making an essential purchase such as buying a home.

NPS vs Bajaj Finance FD

To gain a better perspective on how an NPS investment fares against an investment such as the Bajaj Finance Fixed Deposit, here is a brief review of their comparison:

Feature NPS Bajaj Finance FD
Purpose Investment to save for retirement Investment for a variety of short-term or long-term goals
Tenure Can only exit after 10 years Can choose tenure between 12 to 60 months
Nature of Investment Market-linked Free from market risks
Interest Rate Depends on the performance of asset classes in which you have invested Upto 6.50%, can go upto 6.75% for senior citizens

Thus, from the above table, it is clear that Bajaj Finance FD has several advantages over NPS, in terms of flexibility and assurance of guaranteed returns.

FAQ Suggestions

What is the National Pension System (NPS)?

The National Pension System is a government-backed pension scheme that you can invest in to effectively plan your retirement and save for a post-retirement life.

Is NPS a good investment?

NPS is an ideal investment for those looking to accumulate a corpus for retirement as well as to fulfill various long-term goals.

What are the benefits of NPS?

With NPS, investors can enjoy flexibility of investment as well as avail options in terms of liquidity. Apart from this, you can make partial withdrawal and avail the various tax benefits that accompany NPS investments.

Can we withdraw money from an NPS account?

Withdrawals can be made from an NPS account, but only after a minimum period of 10 years. After this period, NPS account holders can make partial withdrawals or exit the scheme entirely.

Can we withdraw money from NPS before retirement?

You can withdraw money from your NPS account. However, as the benefits of NPS are best reaped over a longer tenure, it is recommended that you stay invested in the scheme for as long as possible.

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