Ask a Pakistani uncle where to keep retirement money and the answer is usually a term deposit or National Savings. Ask a financial planner and the answer is usually a pension fund. Both are right about something. Term deposits are familiar, liquid enough, and never show a red number. A VPS is stickier and scarier but carries tax advantages a deposit cannot match. This comparison uses real published rates from mid-2026 so you can see the actual trade.
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What each product actually is
An Islamic term deposit (Meezan calls its version COII) is a Mudarabah placement with a bank: you commit money for a fixed tenor and receive a share of the bank's earnings as declared profit. Your capital is not contractually guaranteed the way conventional interest is, since Mudarabah involves loss-sharing in principle, but in practice Islamic bank deposits have behaved like stable-value products. A VPS is an SECP-regulated investment account for retirement, invested in equity, sukuk and money market sub-funds you allocate between, with tax benefits attached and access restricted until age 60 to 70.
Returns, using real numbers
As of July 2026, Meezan Bank's COII term deposits declared profit between 7.05% and 10.05% depending on tenor. Bank Alfalah's Falah term deposits declared 7.18% for one year and 7.40% for three. Bank AL Habib's tiered Islamic deposits reached about 8.55%. Set those against VPS money market sub-funds for FY26: ABL's returned 9.63%, Faysal's 9.00%, HBL's 8.96%. Similar territory. The difference-maker is the equity option a deposit does not have: Islamic VPS equity sub-funds returned 32% to 35.5% in FY26. That was an unusually strong year and equity can also fall, but over two decades the compounding gap is why Alhamra's equity sub-fund is up 2,148% since 2007. Deposit rates also reset with the rate cycle; Bank AL Habib's own history shows Islamic deposit rates falling from over 18% in 2024 to around 8% by mid-2026.
Tax: where the deposit quietly loses
Term deposit profit is taxable and banks withhold tax on it, at higher rates for non-filers. A VPS gets the opposite treatment three times over: a Section 63 tax credit on contributions up to 20% of taxable income, tax-exempt growth inside the fund, and up to 50% of the balance tax-free at retirement. For a taxpayer, the credit alone can be worth more in year one than the entire annual profit difference between products. Our Section 63 guide runs the numbers. If you pay no income tax, this whole advantage evaporates, which changes the verdict.
Liquidity: where the deposit wins
Break a term deposit and you typically lose some profit but get your money within days. Withdraw from a VPS before retirement and you face tax on the withdrawal, unwinding the benefit that justified the product. This is not a design flaw. It is the design: retirement money is supposed to be hard to touch. But it means the products answer different questions. Money for a wedding in three years belongs in a deposit or money market fund. Money for age 65 belongs where the tax office pays you to keep it.
Risk, stated honestly
A deposit's risks are quiet ones: reinvestment risk when rates fall, and inflation eroding a return that is fixed-ish in nominal terms. Pakistani inflation has repeatedly run hot enough to turn positive deposit rates into negative real outcomes. A VPS with equity exposure has loud risks: the KMI-30 can drop sharply and your statement will show it. Over short horizons the deposit is safer. Over 25 years, the historical pattern in Pakistan and everywhere else is that diversified equity beats deposit rates, though no one can promise that pattern continues. A VPS money market allocation splits the difference: deposit-like returns, plus the tax credit.
Zakat treatment differs too
Bank accounts, including deposits at Islamic banks, fall within Pakistan's compulsory zakat deduction system on the first of Ramadan unless you file the CZ-50 declaration or the account type is outside its scope. Mutual fund and VPS holdings interact with the deduction system differently, and your self-assessed zakat obligation exists regardless. See our guides to zakat in Pakistan and the zakat calculator for how each asset is treated.
The verdict
For genuinely long-term retirement saving by a taxpayer, the VPS wins and it is not close: comparable or better yields even in its most conservative allocation, plus a tax credit, plus tax-free growth, plus half the balance tax-free at the end. The term deposit wins for shorter horizons, for people with no taxable income to credit against, and for anyone who cannot tolerate a locked account. Many households sensibly hold both: deposits for near-term needs, an Islamic VPS for the long game. What deserves scrutiny is the common pattern of holding only deposits for a retirement that is 25 years away.
Frequently asked questions
Are Islamic term deposit profits guaranteed?
No. Rates like Meezan's 7.05% to 10.05% are declared profit under Mudarabah, announced monthly, not contractual interest. Declared rates move with the bank's earnings and the rate environment. In practice they have been stable, but the structure is profit-sharing and the published sheets say so plainly.
Can I hold both a VPS and term deposits?
Yes, and most planners would encourage it. Deposits and money market funds for your emergency cushion and near-term goals, VPS for retirement. The mistake is not owning deposits; it is using them for a 25-year goal while leaving the Section 63 credit unclaimed.
What about National Savings certificates?
Conventional National Savings products are interest-based. The government now offers Shariah-compliant alternatives through Islamic National Savings accounts and certificates, which occupy similar ground to bank deposits: government-backed, deposit-like, no tax credit.
Is my money safer in a bank than in a VPS?
Different safety. Bank deposits carry the bank's credit and are covered by deposit protection up to a limit. VPS assets are held by an independent trustee, separate from the manager, so a manager failure does not take your units. What a VPS cannot protect you from is market movement in the sub-funds you chose.
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If deposit rates are high right now, should I just wait on the VPS?
Rates in Pakistan cycle hard, and deposit rates that look generous rarely stay put; Bank AL Habib's Islamic deposit rates fell by roughly ten percentage points between mid-2024 and mid-2026. The Section 63 credit, meanwhile, pays in every rate environment. Timing the cycle is a worse strategy than capturing the certain benefit.