How NPS Tier II Has Outperformed Bank FDs?

Investors are searching for safer ways to escape the instability of financial markets during the present COVID-19 period, and the excellent output of National Pension System (NPS) schemes is attracting their interest. And currently, most NPS schemes have performed better than bank fixed deposits (FDs) which is the most favoured investment vehicle for risk-averse investors including senior citizens. We'll look at how the NPS Tier II Account outperformed bank deposits and even compare both.

National Pension System (NPS)

Because the National Pension System is a government-backed scheme, it is seen as a secure investment choice. Tier II of the NPS is a voluntary account, and having a Tier I account is mandatory to open. A Central Government employee who invests in an NPS Tier II Account is eligible for a deduction of up to Rs 1.50 lakh under Section 80C. Three years will be the lock-in period for these accounts. In the last year, the NPS Tier II Account Scheme G, which invests in government bonds and related instruments, has generated double-digit returns. The category's average return was 13.08% in the last year. Check below returns of NPS Tier II Account Scheme G as of Feb 18, 2021: 

Scheme G Tier II
Pension Fund Managers	1 Year returns	3 year returns	5 year returns
Aditya Birla Sun Life Pension Management Ltd.	7.48%	11.00%	NA
HDFC Pension Management Co. Ltd.	7.68%	11.19%	10.38%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	7.42%	10.88%	10.28%
Kotak Mahindra Pension Fund Ltd.	7.46%	10.68%	10.09%
LIC Pension Fund Ltd.	7.11%	12.97%	11.58%
SBI Pension Funds Pvt. Ltd	7.70%	10.90%	10.35%
UTI Retirement Solutions Ltd.	7.28%	10.83%	10.04%
Benchmark Return as on 18/02/2021	6.35%	10.49%	9.43%
Source: NPS Trust

Bank FDs

Investors searching for a guaranteed return can choose a 5-year time deposit. For investors with a low-risk appetite, bank fixed deposits are considered first. The interest paid on fixed deposits is taxed and added to the investor's income. Up to a limit of Rs, 1.5 lakh is also allowed to an investor to gain tax benefits under section 80C if he or she deposits for a period of 5 years. SBI Bank, the country's largest lender, offers a 5% interest rate for a one-year term. As a result, if you choose a fixed deposit for one year or less than five years, you would not be eligible for tax incentives and even get low returns. Whereas if you deposit for a tenure of 1 year in fixed deposit of ICICI, HDFC and Axis you will get an interest rate of 4.9%, 4.9% and 5.15% respectively. These returns are much lower if we compare them with the last 1-year returns of NPS Tier II Account Scheme G.

Banks	Tenure	Rate of interest in %
State Bank of India	7 days to 10 years	2.9 to 5.4
Axis Bank	7 days to 10 years	2.5 to 5.5
HDFC Bank	7 days to 10 years	2.5 to 5.5
ICICI Bank	7 days to 10 years	2.5 to 5.5

A glance at NPS Tier II account

If you already have a Tier I account, you can open a Tier II account. Tier-II accounts are optional and have flexible withdrawal and exit guidelines. Although it functions in the same way as your NPS Tier I account, there are several variations. The Tier II account, unlike the Tier I account, has no lock-in period which means that you can withdraw your corpus anytime. You can also select the type of fund into which you want to invest. That being said, equity funds can only be used to spend 50% of the capital. If you don't specify, the fund will pick instruments for you based on your income, age, and risk appetite. Under regular superannuation, 40% of the account balance should be used to buy an annuity, which pays the subscriber a monthly pension and the remainder as a lump sum. The subscriber can make a complete withdrawal if the account's cumulative corpus is less than or equal to Rs.2 lakh on the date of retirement. A limit of 80% of the pension account balance must be used to buy an annuity that delivers a monthly pension to the spouse, with the remainder paid to the nominee/legal successor as a lump sum. If the account's gross value is less than or equivalent to Rs.2 lakh on the day of the subscriber's demise, the nominee/legal successor has the option of making a full withdrawal. In case of premature withdrawal, a limit of 80% of the pension plan balance must be used to purchase an annuity that grants the subscriber a monthly pension, and the remaining balance must be returned to the subscriber as a lump sum. The subscriber would be able to make a full withdrawal if the cumulative balance in the account is less than or equal to Rs.1 lakh on the date of withdrawal.  

Should you open an NPS Tier II account?

Both Tier I and Tier II NPS are highly similar. The available asset classes to invest in, the fund manager options, and the charges are all the same. Despite the tax incentives, there is an argument to be made for investing in Tier-II NPS. The explanation for this is that if you're new to investing and have a Tier I NPS portfolio, you can opt for an NPS Tier II account. The minimal equity allocation of up to 75% in the case of NPS reduces the chance of equity fluctuations, which may be enticing for new investors. The option to withdraw from a Tier II account with no lock-in enables you to cover your potential emergencies and this aspect strengthens the case for investing in Tier-II NPS. That being said, consider the tax advantages of investing in the account and if you are not a Central Government employee, the contributions would be subject to taxation.