NPS, EPF, FD: Five schemes that provide compound interest and returns
Compound interest is the interest on interest, which helps grow your investment faster as it gets older. E.g., if you invest Rs 1 lakh in a scheme and get a 10 per cent annual interest on it, you will get Rs 10,000 as interest on it every year, irrespective of the longevity of your investment. But if you are getting 10 per cent compound interest on the same, after the first year, your interest will be Rs 10,000, but in the second year, you will get a 10 per cent interest on Rs 1,10,000, and in subsequent years, your interest will keep adding to your principal amount and you will get interest on the overall amount. There are a lot of investment schemes that provide either compound interest or compound growth/return. Here are five of them-
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National Penson Scheme (NPS)
Started in 2004, NPS is a retirement scheme for state and central government employees as well as private sector employees. NPS provides market-linked returns on deposits. It also provides compound growth, so even if you deposit Rs 10,000 a month for 30 years, you can get a monthly income of Rs 1 lakh monthly pension postretirement along with a substantial lump sum at retirement. One gets tax benefits of up to Rs 1.50 lakh in a financial years on NPS deposits. Tier 1 NPS account holders get Rs 50,000 extra tax benefits.
Employees' Provident Fund (EPF)
EPF is another central government-run pension scheme for employees of government as well as private sectors. It provides annual compound interest of 8.25 per cent. One can contribute up to 12 per cent of their basic pay and dearness allowance monthly in their EPF account. The scheme provides lump sum at retirement and monthly pension after retirement. One gets tax benefits of up to Rs 1.50 lakh in a financial years on EPF deposits.
Public Provident Fund (PPF)
The scheme is run by the post office and banks. It has a lock-in period of 15 years. PPF provides 7.1 per cent interest compounded yearly. The interest earned is tax free under Income Tax Act. One can also take loan against PPF in this scheme. On completion of 15 years, one also gets the option to take further extensions of five years. One gets tax benefits of up to Rs 1.50 lakh in a financial years on PPF deposits.
Equity mutual funds
Equity mutual funds, including Equity Linked Savings Scheme (ELSS), provide compound growth in lump sum as well systematic investment plan (SIP) option. If you make lump sum investment in an equity mutual fund scheme, you will get compound growth on your investment even if you don't withdraw it for many decades. The same rule applies to SIP investments. One gets tax benefits of up to Rs 1.50 lakh in a financial years only on ELSS deposits.
Fixed Deposit (FD)
FD is a guaranteed return investment scheme, where compound interest rates vary from scheme to scheme and bank to bank. Popular FD durations are 1-year, 3-year and 5-year. The 5-year FD also provides tax benefits of up to Rs 1.50 lakh in a financial year on FD deposits. One can get return in the form of interest on a monthly, quarterly or yearly basis.