Which is a better retirement plan? NPS or PPF

The concept of having a retirement plan is not only pleasing but necessary. It is an absolute necessity to save today to survive and beat inflation after one’s retirement. The Indian government has launched many retirement plans in the past for the citizens. They aim at inculcating the habit of saving in the citizens during the course of their employment. Two of the popular retirement plans are NPS and PPF.

Overview of NPS

  • National Pension System (NPS) is a government-backed pension scheme managed by Pension Fund Regulation and Development Authority of India (PFRDA). It enables the citizens to save money from their own money to accumulate funds and lead a stress-free life after retirement.
  • The investors get the freedom to invest in four different allocations namely equities, government bonds, corporate bonds and other alternative funds. Also, it allows partial withdrawals up to 25% of the amount invested.
  • At the time of retirement, the investor is allowed to withdraw up to 60% of the corpus which is completely tax-free. The remaining 40% amount is to be invested mandatorily in the annuity.

Overview of PPF

  • Public Provident Fund (PPF) is a savings cum retirement scheme open for all Indian citizens except NRIs. The main aim of PPF is to help those employees build a retirement corpus who are not covered under Employees’ Provident Fund scheme.
  • It has a minimum lock-in period of 15 years and the rate of return is decided by the Ministry of Finance every quarter. Currently, the rate of return is 7.1% per annum for the current quarter (January’21 to March’21).
  • At the time of maturity, the interest, as well as maturity amount, are completely exempted from the tax under Section 80C.

How to Save Income Tax with investment in EPF and PPF

Differences b/w NPS and PPF

PARAMETER

                       NPS

PPF

Minimum investment

₹6,000 p.a.

₹500 p.a.

Age restrictions
(for investing)

18-65 years

No age limits

Maturity period

At the age of 60; or 70 if plan extended by the investor

15 years; extendable by infinite blocks of 5 years

Withdrawal facility

Partial withdrawal allowed after completion of 3 years of investment

Partial withdrawal allowed after completion of 5 years of investment

Risk factor

Risky due to investment in equity funds

Risk-free

Returns

Market-linked

Fixed

Which is a better retirement plan? NPS vs PPF

Both the retirement plans are safe and encourage savings. But there are many factors to consider before choosing between NPS and PPF. PPF is suitable for investors who are desirous of a fixed return without any risk factor. On the other hand, NPS is market-linked and doesn’t guarantee returns. It is suitable for those who are willing to bear the risk for higher returns.

In terms of tax deduction during contribution, both enjoy similar benefits. PPF enjoys tax deduction up to ₹1.5 lakh per year while NPS enjoys tax deduction up to ₹2 lakh per year- 1.5 lakh under 80C and ₹50,000 under 80CCD (1B).

Should I Prepay the Home Loan or Invest in Mutual Funds & Stock Market

In terms of taxability at maturity, 60% corpus is completely tax-free in NPS while 100% amount is tax-free in PPF. Also, the returns from NPS are much higher than the returns from PPF.

All in all, the choice between NPS vs PPF depends on the investor rather than the attributes of the plans.

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