NPS vs PPF: What is the right choice for retirement planning?

Retirement planning has become more crucial in the recent past as life has been full of uncertainties due to the Covid-19 pandemic. So, if you are thinking to start your investment towards retirement planning, then  NPS (National Pension System) and PPF (Public Provident Fund) are among the best options.

What is NPS?

NPS is a government saving scheme introduced for a long-term investment with a view of retirement planning. It is a voluntary market-linked pension savings scheme, that gives returns depending on the performance of markets and pension fund managers. One can either directly open a tier 1 NPS account or it can be opened by the employer. While tier 2 can be opened by banks, brokerage houses, and other financial institutions only if you have a tier 1 account.

What is PPF?

Public Provident Fund is a government initiatied debt-based long-term voluntary saving scheme that has fixed returns set by the government every quarter. PPF is not specifically a pension as is not age bound. PPF accounts can be opened in post offices and banks.

Who can invest?

Initially, NPS was launched for government employees but now everyone can avail NPS pension scheme including NRIs falling under 18 to 60 yrs age criteria. Two types of accounts are opened under NPS – Tier-I for retirement and Tier-II a voluntary account for flexibility. While for PPF, any resident of India falling in any age bracket can invest in this scheme. In the case of minors, parents or guardians look after the investment.  NRIs cannot invest in PPF.

Nature of return:

As NPS is a market-linked scheme, its returns depend on the market’s performance. An investor can choose from equity, government securities, and corporate bonds to invest in. The return differs from in an average range of 9-12%. PPF, on the other hand, is a fixed interest rate scheme that changes every quarter. The current interest rate is 7.1 percent per annum.

Minimum and maximum investment:

The minimum investment in NPS should be Rs 6000 and there is no maximum limit on it. However, the contributions should not exceed 10% of the investor’s salary or 10% of total gross income in case of self-employment. Also, state government and corporate sector contribute equal amount i.e. 10% while state government contributes 14%. In the case of PPF, a minimum of Rs 500  to a maximum of Rs 1.5 lakh can be invested. PPF allows a maximum of 12 contributions per year.

Investment period

One can invest in NPS till the age of 60 years or till retirement. There is also an option to continue the account till the age of 70 years. After maturity 40% has to be kept as an annuity plan for regular income and the remaining 60% can be withdrawn as a lump sum. While in PPF investors can do the lumpsum withdrawal of the entire maturity amount.

Tax benefit

Investments in NPS up to Rs 1.5 lakh are tax exempted under Section 80C of the Income Tax Act. Additionally, Rs 50,000 is also exempted  from tax under Section 80CCD(2).In the case of PPF Investments, up to 1.5 lakh is tax exempted under Section 80C of the Income Tax Act. Also,  the interest and maturity amount is completely tax-free.

Conclusion:

Now, we can say that NPS gives a better return but it has some amount of calculated risk associated while PPF is completely safe but its interest rates are falling gradually. In long term, even the difference of 1% can affect the corpus. So, the choice is yours think wisely and retire smartly.