After SBI reduced savings account rate by 50 basis points to 3.5% on account deposits below Rs. 1 crore, banks both in the public and private sector have followed suit. And it is at this time, you can consider other options to park your idle funds for better returns which provide high liquidity at the same time.
Know why banks have reduced interest rate on savings bank account here.
NPS or National Pension Scheme or System is a retirement product wherein government employees are mandated to contribute for their pension through it otherwise voluntary investment in the scheme is minimal. There are two type of accounts under NPS, Tier I and Tier II. In Tier-I, subscriber of the scheme have to invest for their retirement pension and availing tax benefits. While Tier-II account is optional and can be opened by NPS subscribers who have an active Tier I account.
The NPS Tier-II account is similar to a mutual fund that is being managed by 7 pension fund houses. The account comes with no lock-in period until retirement. This said money from it can be withdrawn at any time without any limitations or conditions. Though, withdrawal takes as many as three days time since the amount get's transferred from trustee's bank account to subscriber's bank account and the redemption amount depends on the applicable NAV at the time of redemption.
Nonetheless, returns from the account are in the range of 11.5%-14% which are way higher than savings account or FD returns. The subscriber gets to earn market linked returns from a combination of financial instruments that include corporate debt, equity and government securities. One year average return from equity, govt. securities and corporate bonds in Tier II account is 17.5%, 19% and 11% respectively.
Taxation of NPS Tier-II accounts
Unlike Tier I account of NPS, subscribers do not get tax deduction benefit u/s 80C of the Income Tax Act. Also, taxation on it is similar to any other debt or fixed income instrument, i.e., the returns are added to the total income and taxed as per your slab rate.