/financial-express-hindi/media/media_files/a6DFh2YRED0Z4S50qbHi.jpg "PPF interest rate not increased again, so is NPS a better option? Where will you get how much return?")
PPF vs NPS : which is better investment option for retirement:The amount of interest to be paid on Public Provident Fund (PPF) for the current quarter starting from July 1 has been announced. The government has not increased the interest rates of PPF this time as well. Actually, the last change in the interest rate on PPF was in the April-June 2020 quarter. Since then, the annual interest rate on PPF has remained at 7.1 percent. During these 4 years, the interest rates of many other small savings schemes were increased, the Reserve Bank also increased its policy interest rates several times, but the rates of PPF were not increased. Therefore, it is natural for the question to arise in the minds of people whether we should still invest in PPF or should we look towards other options like NPS?
Where should one invest for retirement
Public Provident Fund is mainly a long term scheme in which many people invest for their retirement. But after the interest rates of this scheme were not increased for 4 years, many investors may have this question in their mind that should we consider some other options for retirement. If you are also thinking like this, then you can also consider schemes like NPS which are launched specifically for retirement.
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What is National Pension System (NPS)
National Pension System (NPS) is a long term investment scheme launched with the support of the government, which aims to provide retirement fund as well as lifelong pension to the people. This scheme generates better returns through investment in equity, but it does not provide guaranteed returns like PPF. Investment up to Rs 2 lakh in a year in Tier 1 account of NPS is tax exempted. Maturity occurs on your retirement, but the entire fund is not available in lump sum. Annuity has to be purchased with at least 40 percent of the amount, in return for which you get pension. The lump sum amount received on maturity is not taxable, but the pension amount is taxable.
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Different categories of investment in NPS
Your money deposited in NPS Tier 1 account can be invested by dividing it into three asset classes. 1. E means Equity, 2. C means Corporate Bonds and, 3. G means Government Securities/Bonds.Investors who choose Active Choice in NPS can decide how their money will be distributed among these three asset classes, but in any case, the investment in equity will not exceed 50 percent. But for investors who choose the option of auto choice, the asset allocation of their investment is done according to their age, the formula for which is already fixed.
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Last 10 years return on investment in NPS
Scheme E (Tier 1)
UTIRSL : 14.53%.
HDFC-PF : 14.36%,
ICICI-PF : 14.18%
Kotak PF : 14.14%
LIC-PF : 13.28%
SBI-PF : 13.45%
Scheme G (Tier 1)
LIC-PF : 9.64%
SBI-PF : 9.20%
Kotak PF : 9.16%
HDFC-PF : 9.15%
ICICI-PF : 9.07%
UTIRSL : 8.88%.
Scheme C (Tier 1)
HDFC-PF : 8.98%,
ICICI-PF : 8.90%
SBI-PF : 8.74%
LIC-PF : 8.66%
UTIRSL : 8.44%.
Kotak PF : 8.41%
What do NPS figures say
The data of past returns on NPS clearly shows that this scheme is giving much better returns than the 7.1 percent annual interest of PPF. Not only Scheme E which invests more in equity, the annual returns of Scheme G which invests in government bonds and Scheme C which invests in corporate bonds are also much better than PPF. This difference in returns matters a lot in long term investments. You can also understand this with the help of the calculation given below.
Estimated return on investment in PPF for 15 years
If we assume a PPF return rate of 7.1%, then the calculation of the return one would get on investing Rs 12,500 every month for 15 years, as per the maximum annual limit of Rs 1.5 lakh, is given below:
PPF annual interest rate: 7.1%
Monthly Deposit: Rs 12,500
Total deposit in 15 years: Rs 22,50,000
Maturity amount after 15 years: Rs 39,44,599 (including interest)
Total interest received in 15 years: Rs 16,94,599
Estimated return on investment in NPS for 15 years
In NPS, the rates of return on schemes E, G and C are different. But if we assume an estimated rate of 10 percent, which is slightly higher than the return of scheme G which has government bonds, then the return on investment made through SIP in 15 years will be something like this:
Estimated annual return on NPS: 10%
Monthly SIP: Rs 12,500
Total investment in 15 years: Rs 22,50,000
Total corpus accumulated in 15 years: Rs 52,24,053
Profit in 15 years: Rs 29,74,053
NPS is far ahead in terms of returns
Although a maximum investment of Rs 2 lakh in NPS is tax exempt, for ease of comparison, we have given the calculation on an annual investment of Rs 1.5 lakh only. It is clear from this calculation that if the same amount is invested every month, then the total estimated profit on NPS in 15 years (Rs 29,74,053) is much more than the total interest received from PPF (Rs 16,94,599). But before taking a decision based only on returns, it is also important to understand some special features of PPF.
It is important to consider these features of PPF
Even though the interest rate of PPF has not increased for four years, there are two such features of this scheme due to which people are still investing in it. The first feature is that PPF is a ‘Triple E’ (EEE) scheme in terms of income tax. That is, not only does it provide tax exemption under section 80C on investment up to Rs 1.5 lakh annually, but the interest received on it and the entire amount received on maturity is also completely tax-free. The second big feature of PPF is that the investment made in it is completely safe. Being a government guaranteed scheme, your money remains completely safe and there is also a guarantee of getting the interest declared on it every three months.Now it is up to the investors to decide whether they want to invest in PPF for better security and tax benefits or turn to NPS for higher potential returns. Or invest by dividing their money in both the schemes.
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