The government wants people to create a retirement fund from their savings, especially people who do not have social security cover provided by the government. In this article, we have discussed NPS Vs PPF in detail.
All of us know the concept of retirement. Post-retirement, you don’t have to worry about going to the office. You don’t have to worry about getting dressed up early in the morning, traffic jams or office work pressure. You have a lot of time for yourself. You can fulfill all your desires or take up hobbies. But, two things can make your retirement less than ideal. The first one is inflation and the second one is increasing life expectancy, i.e. people live longer now. A combination of these two can put you in trouble if you have not saved properly for your retirement. Due to these reasons, the government has made options available for retirement savings.
The government has come up with investment schemes that save money for retirement. Govt also encourages people through tax benefits. There are two financial products available for this-
- Public Provident Fund i.e. PPF and
- National Pension Scheme i.e. NPS.
Both these products are included in Section 80C of the Income Tax Act. Thus, you can claim a tax deduction by investing in these products. . Which of these two products is better for retirement.
Investment in Public Provident Funds
The government of India started the PPF scheme in 1968. The main motive behind this scheme was that the people who are working in the unorganized sector or do not fall under the scope of employees provident fund, can invest in it and create a retirement fund for themselves. This scheme has also been made available at the post office so that most people of the country can take advantage of this scheme.
PPF is a long term saving cum investment product that comes with a lock-in period of 15 years.
You get guaranteed interest on the amount that you invest in this. You can claim tax deduction by investing up to 1.5 lakhs in a financial year in PPF and save tax. You can avail this exemption under Section 80C of Income Tax Act 1961. People who are risk-averse, prefer to invest in PPF as it gives guaranteed return. Apart from this, they also get the benefit of tax exemption.
Investment in NPS (National Pension Scheme)
On the other hand, NPS is a market-linked voluntary contribution retirement scheme. This allows you to create a retirement corpus fund through which you can get a pension for your entire life after retirement. This scheme is available to all Indians who fall in the 18 to 65 years bracket. You will not be able to withdraw funds invested in NPS before you turn 60 years of age.
This lengthy lock-in period ensures that the amount invested in this scheme is used to take care of your post-retirement needs. However, you can withdraw a certain amount of money for conditions like critical illness, children’s education, marriage expenses and to buy or construct a house.
NPS Vs PPF: Similarities
As we had mentioned earlier, both NPS and PPF are retirement options and thus have certain similarities. Let’s see what they are. Both the schemes have been launched for long term retirement savings. You have to open an account to invest in both the schemes.
Investment in both schemes allows you to claim tax exemption. Both schemes are of long duration and have a longer lock-in period. The Lock-in period of PPF is 15 years and NPS account matures at the age of 60.
Returns on PPF and NPS are tax-free. Maturity amount is also tax-free for both NPS and PPF You have seen the similarities, now let us tell you the differences between them. PPF offers you guaranteed returns which is at 7.9% currently, whereas, NPS does not offer guaranteed returns.
Returns in NPS are market-linked and thus can be fluctuating. The lock-in period of NPS is up to 60 years of the subscribers age, whereas the lock-in period for PPF is 15 years. You do not have the choice to decide how your money would be invested in PPF.
Whereas in NPS, you can decide the fund in which your money would be invested and the fund manager who would manage it. Also, if you have any legal liabilities, it cannot attach your PPF account, but this facility is not available with NPS.
NPS vs PPF: Which One is Better options?
Now, let’s talk about the better option between these two. If we talk about retirement savings, NPS is better when compared with PPF.
Let’s understand this through an example. Let us assume that two friends Sanjeev and Sahil started saving Rs. 1.5 lakhs every year for retirement from 2019. Both are 25 years old, and like all of us, they also want to retire at the age of 60 years. And, both of them would keep investing till 2054 i.e. till they don’t retire. But their method of saving is different.
Sanjeev chose NPS and Sahil picked PPF. If you assume the average PPF rate to be 8% and the average returns rate of NPS to be 10%, then let’s see what would be their investment value at the age of 60. In these 35 years, both will invest aroundRs. 52.5 lakhs. However, Sanjeev’s retirement corpus would be 4.47 crores and Sahil’s would be only 2.79 crores. The huge difference in the investment returns in both the schemes is due to compounding. If we look at the trends of the previous years, we can see that the PPF rate is decreasing whereas NPS can offer a return of more than10%.
In such a scenario, by the time they both reach retirement age, the difference in the amount may increase further. As you saw, investing in market linked NPS allows you to create a huge corpus amount, whereas it is difficult to create a huge corpus amount by investing in PPF because the returns are low.
To sum it up, though both NPS and PPF are options to save for retirement. However, beating inflation in the long-term and creating a large bank balance for retirement, is possible only through NPS.
As you have seen, NPS is a great option to save for your retirement. Hope now you are clear to choose between NPS Vs PPF.
If you would like to invest in PPF, Read Public Provident Fund (PPF Account)- Eligibility, Documents, How to open, Tax benefits: Guide
You can also refer: Deductions Under Chapter VI A [2020-21]: Section 80C, 80D To 80U