When you’re young with lots of income, planning for retirement might not feel like something that needs to be done urgently. Regardless, financial experts will always recommend starting as early as possible. Pertaining to the topic of retirement, a corpus has indeed become important considering the increasing life expectancy and the high cost of health care services. In India, two of the most popular options for long term investments are the Public Provident Fund (PPF) and the National Pension System (NPS).
Both have the same goal of helping people financially prepare for retirment. However, the differences in structure, returns, flexibility and taxes set them apart.
Anyone who is a citizen of India has access to both PPF and NPS. Furthermore, the rules shift when it comes to Non Resident Indians (NRIs). If the PPF account was opened before the change in residency status, NRIs can hold onto their existing accounts. Although they are not allowed to open new accounts. However, NRIs can invest in NPS after completing KYC which makes NPS more accessible to the Indian workforce living abroad.
Liquidity and Returns
Public Provident Fund, or PPF, has a permanent interest rate which is updated by the government every quarter. Currently, it sits at 7.1%. It has a lock-in period of 15 years with partial withdrawals available from the 7th year. Loans can be accessed starting from the 3rd year. Government assurance and the predictability in returns makes it a stable, low-risk investment.
NPS, on the other hand, does not offer any assured returns because it is linked to the stock market. Investors have the freedom to choose the allocation of their funds into equity, corporate bonds, or even government securities. Depending on asset allocation, historical records shows NPS has provided returns between 8% to 10% annually alongside market performance. Despite posing greater risk, these options have the potential to significantly propel retirement savings.
Tax Efficiency
PPF is considered one of the most tax-efficient instruments because it follows the Exempt-Exempt-Exempt (EEE) taxation model. This means that all the contributions, interest earned, and the maturity amount are tax-free.
NPS also provides strong tax benefits. Under section 80C, one can claim deductions of up to ₹1.5 lakh. An additional ₹50,000 can be claimed under section 80CCD(1B), resulting in a grand total of ₹2 lakh. The fund is 60% tax-free upon maturity, however 40% has to be spent on an annuity which is taxed based on the individual’s income slab.
Control Over Investment and Transparency
The PPF is a passive investment option that requires no action from the investor as it is managed by the government. There is little to no visibility on the investment options chosen for the funds.
In comparison to PPF, NPS gives far greater control to investors. They can select and change their fund managers and shift their investments between different asset classes such as equities, government bonds, and corporate debt. Investors also have access to performance updates, meaning they have greater transparency compared to PPF.
Which Option Is Right For You?
Conservative investors who seek stability will benefit more from PPF since its returns are predictable. Investors looking to achieve higher returns in the long term will find value in the high risk potential of NPS.
Combining both options tends to be the best strategy recommended by financial advisors. PPF makes for a stable investment to anchor to while NPS can be used to diversify retirement portfolios and improve returns. This approach ensures financial security while allowing steady growth towards a comfortable retirement.
