PPF or NPS — Choosing your retirement fund builder

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Building a retirement fund is a necessary step for every salaried individual. For many, it is a goal right from the first year of working life.

Most want to get a combination of security and capital appreciation and these are not mutually exclusive.

Money9 looks at the pros and cons of two basic savings instruments — PPF and NPS.

PPF

Public Provident Fund or PPF is a completely safe investment instrument. It has a minimum lock in period of 15 years. After that one can extend it up to 60 years.

One big advantage of PPF is that the entire corpus, principal and interest are tax free even on maturity irrespective of the amount accumulated.

But a disadvantage is the interest rate. Currently the interest rate of PPF is 7.1%, and every quarter this rate can be revised by the Centre. The interest rate of PPF was reduced by more than 1.1% in the last 2 years.

Investment planners feel that the rate will be further pruned in future that will generate lower and lower returns. The returns can only go down in the foreseeable future.

NPS

National Pension System or NPS also allows monthly contributions of as low as Rs 500. PPF allows annual contributions of only Rs 500.

But unlike PPF, NPS funds are locked till the person attains 60 years of age.

No partial withdrawal is permitted except for some specific needs like children’s education, children’s marriage, critical illness etc.

But the main difference from PPF is that in NPS the pooled in money is invested in debt and equity fund. A minimum of 40% and a maximum of 75% of your money can be invested in equity, and the rest in debt.

The general principle followed is that as the age of the investor rises, the share of equity is reduced and the share of debt in increased.

This share can vary but here the investment pattern consists of both debt and equity funds. Every year, the investor can also stipulate the share of the equity or debt in his mix.

Both NPS and PPF attract the same tax benefit under section 80C of IT Act.

Case study

Consider a person starts his/her contribution at the age of 25 with Rs 3,000 per month. Consider the person will continue the PPF account till he turns 60.

We are also assuming that the interest rate of PPF stands at the current 7.1. Then the total nominal contribution will be Rs 12.6 lakh, and the cumulative return would be around Rs 54.6 lakh.

On the other hand, if all the parameters are same for NPS then at the age of 60 the person will get a minimum of Rs 1.15 crore. We are assuming a 10% return on investment. Experts feel in NPS a 10% return over a period of 35 years is rational and conservative.

When the investor turns 60, the contributor will get around Rs 1.15 crore, of which Rs 69 lakh will be credited to his account in the first year and Rs 46 lakh will be given as annuity. NPS calculator suggests that the person will get monthly pension around Rs 23,000 after 60 years of age.

If one deploys 70% of his funds in equity, returns might be higher.

In such a scenario, experts consider that the return would not be less than 12%. Therefore, the total return might be to the order of Rs 1.9 crore to Rs 2.1 crore after 35 years of investment.

If the person reserves 40% for the annuity scheme then he/she will get Rs 1.2 crore at the age of 60 years and will get around Rs 78 lakh as annuity, which convert into Rs 25,500 as monthly pension.

Bottom line

Both NPS and PPF are retirement savings options. In the long-term, NPS is more likely to build a bigger corpus than PPF.

The tax benefits combined with the flexibility of how and where your money can be deployed makes NPS an ideal retirement product.

“PPF and NPS give same income tax exemption to the investor on its investment up to Rs 1.5 lakh in a single financial year. But still NPS is market linked and yields high return. I always advise my clients to go with NPS first then with PPF,” said Nilotpal Banerjee, a financial advisor.

“If you plan for a secure retirement life then go with NPS as it gives a higher return. But I also suggest that everyone should open a PPF account, because at the end of day you will get guaranteed return through PPF. It might be low but it is secure,” said Narayan Jain, another IT expert from Kolkata.