NPS vs PPF: Which Option is Better for Retirement Planning: What is the biggest question when planning for retirement? Not only this, how will all the financial needs be met after the salary stops? Will current savings and investments be enough to meet all expenses? To answer this question, it is important to invest in the right plan at the right time and not to scare. But what is this right investment plan? Although there are many retirement plans and pension schemes available in the market for investment. Nevertheless, Public Provident Fund (PPF) and National Pension System (NPS) are quite popular because of the support they receive from the government. But many times there is confusion as to which is better between these two schemes? To know the correct answer to this question, it is necessary to compare NPS and PPF, which we will do further. But first let us know the special features of both the schemes.
What is National Pension System?
National Pension System (NPS) is a government sponsored pension scheme, which has been brought with the aim of providing better returns through investments in the market. Through this scheme, investors can earn high returns on their investments in the long term within a government regulated system. By investing in this scheme, any person can create a retirement corpus and receive a regular pension after retirement while saving on income tax.
NPS is designed to provide pension security to workers in both organized and un-organized sectors alike. The objective of NPS is not only to provide financial security after retirement but through it you can also get good growth on your investments. However, withdrawal of investment made in this scheme is allowed only after retirement. In this, the permission to withdraw the deposited funds prematurely is available only after 10 years under certain circumstances.
Tax exemption on investment in NPS
Tax benefits are available on investing in NPS. This scheme not only provides tax exemption under Section 80C of the Income Tax Act on investments up to Rs 1.5 lakh during a financial year, but also on investments up to Rs 50,000 annually above Rs 1.5 lakh under Section 80CCD(1B). Tax benefit is available. That is, tax exemption is available on investment in NPS up to a total investment of Rs 2 lakh in a year, which is not available in any other investment. National Pension System (NPS) is available to all citizens between the age of 18 to 70 years.
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What is Public Provident Fund?
Introduced in 1965, Public Provident Fund or PPF is a government-sponsored scheme that offers guaranteed returns on deposits through compound interest. This scheme has a lock-in period of 15 years. This scheme can help you build a retirement corpus through long-term investments. The current annual interest rate (PPF Interest Rate) of this scheme is 7.1 percent. This scheme is considered an ideal option for those looking for a risk-free investment option. Under Section 80C of the Income Tax Act, tax exemption is available on deposits up to Rs 1.5 lakh in a PPF account during a financial year. It is necessary to invest a minimum of Rs 500 and a maximum of Rs 1.5 lakh every year in the account. A total of 12 deposits are allowed in a year. PPF account matures in 15 years, but after depositing continuously for 5 years, withdrawal can be allowed for special purposes like higher education or medical emergency.
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NPS vs PPF: What is the right plan for retirement?
To understand which scheme is better for investment between NPS and PPF, it is important to compare the features and rules of both the schemes. PPF is a scheme that gives fixed and guaranteed returns, but the interest rate available on it is not the best. However, if you invest consistently over a long period of time, this scheme can help you build a huge corpus. Completely safe investment and guarantee of returns is the biggest feature of this scheme. Apart from this, the tax exemption available on investment up to Rs 1.5 lakh in a year is also a big attraction of this scheme.
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On the other hand, investing in NPS offers better market-based returns, that too with tax exemption available on investments up to Rs 2 lakh per year. The expense ratio of NPS is very low compared to other schemes investing in the market, due to which the net returns are expected to be better. However, due to investing in the market, there is some market risk in it. Under NPS rules, it is necessary to invest at least 40 percent of the maturity amount in annuity for pension purposes. Due to this, the investment options become limited, but at the same time regular income is also arranged.
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Choose the right scheme according to your specific needs
Both the schemes have many such features which can strengthen your retirement planning. But which of the two schemes is more suitable for you, you will have to decide based on your personal preferences, needs and risk appetite. If you do not want to take any risk on your investment and like a scheme with guaranteed returns, then PPF can be a good option for you. But if you are willing to take a little risk for better returns, then NPS is a better option. Overall, both PPF and NPS have their own plus and minus points. After considering them, you can choose the right scheme according to your specific needs and investment goal.