PPF or NPS, which one is better for retirement planning? Here is what experts say
Investors planning for their retirement have two options — PPF and NPS. Both allow income tax exemption but they have some difference that an investor must know.
Public Provident Fund (PPF) and National Pension Scheme (NPS) are mainly known as retirement tools as both serve the same purpose for an investor. However, the reality is a little different. As per the investment experts, PPF is better suited for those who want flexibility in their investment while those who are investing only for their retirement, NPS is a better investment option. An NPS investment yields near 10 per cent post-tax return, say experts. But, in the case of PPF, the return is around 8 per cent. Ironically, both investment options make an investor eligible for Income Tax deduction under section 80(C) of the Income Tax Act. Under section 80C, the maximum investment allowed in PPF is Rs 1.50 lakh per annum. Additionally, an investor can invest in NPS under sec 80CCD (1B) up to a maximum of Rs 50,000 per annum.
Speaking about PPF and NPS investment, Milin Shah, Head - Product Development & Planning at HappynessFactory said, "NPS is a product where one invests till 60 years of age with the option to invest till the age of 70 years. Post-retirement, the rule says that one can withdraw approximately 60 per cent of the corpus as a lump sum without any tax impact and the remaining 40 per cent will be in the form of an Annuity and will be taxable, just like any other income."
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Shah further said that the NPS allows an investor to diversify his or her portfolio between Equity, Government Securities and Fixed income instruments. "An investor can invest up to 75 per cent in Equity funds and this is a great advantage of NPS. While equity investments can be volatile, over the long horizons of a typical NPS investment, they are likely to generate higher returns than fixed income securities (Like PPF)."
Highlighting the flexibility benefits in PPF against the NPS investment Kartik Jhaveri, Director — Wealth Management at Transcent Consultants said, "In PPF, an investor can't invest beyond Rs 1.5 lakh while in NPS an investor can invest any amount though he or she can claim tax benefit up to Rs 50,000 in one financial year." He said that in PPF, an investor has more flexibility as he or she can stop investment after 5 years and can withdraw the whole amount after 15 years while in NPS the whole amount is strictly fixed for a long period till the investor attains 60 years of age and the investor can't fish out the amount in between.
Speaking on the features of the PPF and NPS, Jhaveri added, "A PPF account matures after 15 years. One may extend the term after 15 years by a block of another 5 years with or without making additional contributions. The maturity amount of PPF is 100 per cent tax-free. PPF is a 100 per cent Debt oriented product, guaranteed by the government, providing safety of capital. The current annual interest rate on PPF is 7.9 per cent."