## FD *plus* RD beats Atal Pension Yojana

You can generate better Post-Tax returns from Atal Pension Yojana by timing RD and FD together. I have tried to summarize the calculation in the simplest manner by an example.

Mr.A aged 30 years, working as a mason in a small village, heard about the much hyped Atal Pension Yojana and enrolls himself in it.

If you are still unfamiliar with Atal Pension Yojana than do visit this thread to Insight on Atal Pension Yojana.

Another mason Mr.B of the same age of 30 years working in the same village heard about the scheme but thought of discussing it with his literate son before enrolling himself in it.

His son has done some calculations and asked Mr.B to go with Recurring Deposits and Fixed Deposits consecutively to earn better returns than Atal Pension Yojana.

### Let’s dive into the calculation:

The calculation is based on few assumptions:

- Both Mr.A and Mr.B have a life expectancy of 90 years.
- Rate of return of RD and FD will remain constant throughout the investment cycle at 8% and 9%
- Tax Rate will remain same as 10%, making post-tax return of 7.2% of RD and 8.1% of FD.
- There is no major time gap in transferring money from RD to FD.
- Both Mr.A and Mr.B have a nominee to claim the corpus money.

### Retirement Planning of Mr.A:

Mr.A started investing Rs.577 per month for 30 years in Atal Pension Yojana (being maximum age of contribution is 60 years in APY) to get lifetime pension of Rs.5,000 per month plus his son (nominee) would receive Rs.8.5 lakhs on his demise. In this way, Mr.A secured his life till 90 years as well the life of his son.

**Total Benefit Mr.A will receive:**

**Pension for 30 years** i.e. Life expectancy of 90 years less contributing age of 60 years.

= Rs.5,000 x 12 months x 30 years

= Rs.18,00,000 (Rs.18 lakhs)

**Nominee Corpus**

= Rs.8,50,000

**Total Money Receivable:**

= Rs.18 lakhs + Rs.8.50 lakhs

= Rs.26.50 lakhs

### Retirement Planning of Mr.B:

Mr.B being little cautious took advice from his son and started investing Rs.577 per month for 10 years in Recurring Deposit at 8% per annum compounding quarterly. Assuming he falls in tax-bracket of 10%, the post-tax return would be 7.2% per annum.

He gets RD maturity amount of Rs.1,01,340 which he is advised to invest in Fixed Deposit at 9% for 10 years together with new RD of Rs.577 for next 10 years at same interest rate of 8% per annum.

Post-tax return of FD would be 8.1% which results into maturity value of Rs.2,25,970.

By the time his FD matures, second RD also reaches the maturity and he would have Rs.3,27,310 (First RD and First FD) which he has to invest again in FD for 10 years at same post-tax interest rate of 8.1%.

Simultaneously he has to invest in third RD of Rs.577 per month for 10 years at the same post-tax interest rate of 7.2%.

Finally, when his second FD (maturity amount Rs.8,31,370) and third RD (maturity amount Rs.1,01,340) matures he would be at the age of 60 years and would have Rs.9,32,510 in his hands.

All he has to do now is to put Rs.9,32,510 in FD which would fetch him 8.2% post-tax return which translates into Rs.6,295 per month.

**Total Benefit Mr.A will receive:**

= Rs.6,295 x 12 months x 30 years

= Rs.22,66,000 (Rs.22.66 lakhs)

**Nominee Corpus i.e. amount deposited in bank FD**

= Rs.9,32,510

**Total Money Receivable:**

= Rs.22.66 lakhs + Rs.8.32 lakhs

= Rs. 31.98 lakhs

### Incremental Returns of Mr.A over Mr.B i.e. RD+FD over Atal Pension Yojana

= Rs.31.98 lakhs –Rs.26.50 lakhs

= Rs. 5.48 lakhs i.e. 20% (approx..)

I tried to present the calculation in simplest form yet it may not be so simple and there may be some errors which you can point out in the comment section.

*Written by Mayank Singh, working as a research analyst in a private firm.*

Ashutosh says

An illuminating comparative analysis by Sh Mayank Singh.

Although, i settled on the notion that APY is a better option, as it is more hassle-free and dependable one.

Thank you very much Mayank..

Udit Chauhan says

There is no matter about money…

APY provide us a social security at the old age.. it’s more important…

Second thing that FD a d RD rates will be reduse in next year’s…..

ARUN KAMAT says

There is one more negative about APY. If the person dies before attaining the age of 60 years , the amount deposited upto will be returned to NOMINEE wothout any interest !

Whereas the nominee can enjoy both RD amount & FD amount upto date with interest !!

Why Govt. should return only amount deposited to Nominee, if the pensioner dies before 60 years? Is it not unfair ?

Pankaj says

Nobody has paid attention to the rate of return calculation of FDs and RDs. Are we sure that we will be able to lock RD at 8%. I see in the next 15 years. RD returns falling to 6.5 from current 8.5 percent.

mehul says

Hello i think u have miscalculated the 2nd F.D maturity value . it should be Rs. 729832 , there for final corpus value after 30yrs =(729832+101340)=Rs 8,31,172 and intt. on this for 1yrs will be =69397(I.e 5783p.m). hence for next 30yrs he will get Rs 5,783 p.m.

NPS says

Also, that is assured pension. If the returns from the market are more as per the underlying NPS account, the annuity would also be higher in the pension scheme.

Vidya says

The difference between the two is that in case of ATY u get the pension irrespective of the corpus in the bank(FD)..in case you have to withdraw it you are stuck without any pension.whereas in case of ATY you are assured of the pension for your lifetime.