The Public Provident Fund (PPF) and National Pension System (NPS) are very popular among investors who want to save for retirement. To decide which of the two schemes is better, we need to compare them. For a proper comparison, it is important to understand the features of both PPF and NPS thoroughly.
What is Special About NPS?
The National Pension System (NPS) is a pension scheme introduced by the government. It invests in both fixed-return assets and equity, which gives investors the potential for better returns. Long-term investments through NPS can offer higher returns compared to the stock market.
This is why it is considered a better option for building a retirement corpus over time, helping to provide a good pension after retirement. Additionally, NPS offers income tax benefits.
The NPS is designed to provide pension security to both organized and unorganized sector workers. Anyone between the ages of 18 and 70 can invest in this scheme. It not only provides financial security after retirement but also allows for capital appreciation on investments.
Since NPS is meant to provide a pension to investors, a large portion of the money invested can typically only be withdrawn after retirement. Upon maturity, a portion of the corpus must be used to buy an annuity for the pension. Withdrawals before maturity are allowed under certain conditions.
NPS Offers the Highest Tax Exemption
Investing up to Rs 1.5 lakh in NPS during a financial year provides tax benefits under Section 80C of the Income Tax Act. Additionally, it is the only scheme that allows an extra tax exemption of up to Rs 50,000 per year under Section 80CCD (1B), beyond the Rs 1.5 lakh limit.
In this way, you can invest up to Rs 2 lakh in NPS during a financial year and receive tax benefits. No other scheme offers such an exemption. These benefits apply only to investments made in the Tier 1 account of NPS.
What is Special About PPF?
The Public Provident Fund (PPF) is another government-backed investment scheme. The money deposited in PPF earns fixed, guaranteed returns as per the interest rate declared by the government. The maturity period of PPF is 15 years. Due to the long lock-in period, PPF is a good option for regular, long-term investments. Currently, PPF offers an interest rate of 7.1 per cent per annum.
Because PPF offers guaranteed returns, it is ideal for investors who want to avoid risks.
To keep a PPF account active, a minimum deposit of Rs 500 is required each year. Contributions can be made up to 12 times a year. The account matures in 15 years, but after 5 years of continuous deposits, you can withdraw money for specific purposes like children’s education, marriage, or medical emergencies. You can deposit up to Rs 1.5 lakh in a PPF account annually, and this amount qualifies for tax benefits under Section 80C of the Income Tax Act.
NPS vs PPF: Which is Better for You?
To decide which scheme is better for you—NPS or PPF—you need to consider their special features.
PPF’s main feature is its risk-free, guaranteed returns, but the interest rate is not very high. Despite this, by investing regularly over the long term, you can build a substantial retirement fund.
On the other hand, NPS does not offer fixed, guaranteed returns like PPF. However, since part of the corpus is market-based, you have the potential to earn higher returns. Moreover, NPS has a low expense ratio compared to other funds investing in the stock market, resulting in better net returns. Another significant feature of NPS is that you can get tax exemption on investments up to Rs 2 lakh per year, while PPF only offers an exemption on investments up to Rs 1.5 lakh.
Because of these tax exemptions, NPS offers better net returns. However, keep in mind that NPS is not risk-free due to its exposure to the stock market. When the scheme matures, at least 40% of the amount in your NPS Tier 1 account must be invested in an annuity for a pension. As a result, at retirement, the full amount is not available as a lump sum, but you will receive regular income through the annuity, which provides relief after your salary stops.
Take a Decision Based on Your Needs
Both NPS and PPF are excellent schemes that can make your life financially secure after retirement. The right choice depends on your personal needs, risk tolerance, and investment goals.
PPF is ideal for those who want completely risk-free investments and returns. However, if you are looking for higher growth in your capital by investing in the market, along with more tax exemptions, NPS might be a better option. NPS can also be more effective in beating inflation in the long run.
Both schemes have their advantages and limitations. By carefully considering these factors, you can choose the right scheme for yourself. But remember, whichever scheme you choose, you will only benefit fully if you make regular investments over the long term.