Planning your retirement is crucial if you want a sustainable lifestyle post your employment years. A majority of the Indian population is in the private sector. Therefore, retirement planning is crucial. The two most popular investment options for retirement planning in India include the National Pension Scheme (NPS) and the Public Provident Fund (PPF).
While both investment options have their pros and cons, the question arises as to which investment option is better for retirement planning in India. Let’s do a deep dive and compare both options to find a definitive answer.
What is NPS?
National Pension System or NPS is a government-sponsored retirement savings scheme launched in January 2004. NPS investment is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It offers individuals an opportunity to invest in a wide range of investment plans, including equity, debt, and government securities, along with several tax benefits.
The NPS pension scheme provides two types of accounts – Tier I and Tier II. Tier I is a mandatory account for individuals who wish to invest in NPS, while Tier II is a voluntary account that allows individuals to invest additional amounts and withdraw funds at their convenience.
What is PPF?
A Public Provident Fund, or PPF, is a government-backed savings scheme initiated in 1968. It offers investors an attractive interest rate and is among the safest investment options available in India. PPF has a maturity period of 15 years, which can be extended in the blocks of 5 years.
Additionally, PPF offers some exciting tax benefits under Section 80C of the Indian Income Tax Act.
Comparing NPS with PPF
Now that we know about NPS and PPF, it’s time to compare these on different grounds to know which is a better investment plan for retirement.
- Return on investment
The NPS pension scheme offers a higher potential for returns than PPF. This is because the returns on NPS are market-linked and depend on the underlying funds’ performance. PPF, on the other hand, offers a fixed rate of return, which is currently 7.1%. However, it is essential to note that NPS returns are not guaranteed, and the performance of the underlying investments is subject to market risks.
If you are interested in actively trading securities, you may want to consider opening a trading account in addition to a demat account. It’s important to note that while NPS allows you to invest in securities through a demat account, it is primarily a pension scheme and not designed for active trading. On the other hand, if you are looking for a savings scheme with tax-free returns, PPF can be a good option to consider.
- Tax benefits
Both PPF and NPS investments offer tax benefits to investors. Under Section 80C of the Income Tax Act, investments in both NPS and PPF are eligible for tax deductions up to Rs. 1.5 lakh per year. Additionally, investments in NPS also qualify for an additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B) of the Income Tax Act.
- Liquidity
PPF offers higher liquidity than NPS. While investments in PPF have a maturity period of 15 years, partial withdrawals are allowed after five years of investment. Additionally, loans can be availed against the PPF account balance after the third year of investment. On the other hand, NPS have a lock-in period of at least three years, and account matures at the age of 60 years . The premature withdrawals from NPS account are subject to certain conditions.
- Annuity payout
NPS has a mandatory 40% of annuity option while PPF does not have any Annuity provision. An annuity payout is a fixed amount paid out to the investor on a regular basis after retirement. While the lump sum withdrawal at the retirement is tax free in NPS, the annuity payout is subject to income tax, as per current slab of the investor. On the other hand the corpus received from PPF is absolutely tax-free.
Final Words
Both NPS and PPF are good investment options for retirement planning in India, and investors should choose the option that suits their requirements. However, you should assess your financial objectives, income requirements, and financial obligations to choose the best fit. For instance, opt for PPF if you want lump sum fixed returns, while opt for NPS if you want to enjoy higher returns from professionally managed funds.