Creating a good retirement corpus requires consistent investments over a long period of time. Considering inflation and growing life expectancy, individuals should allocate a portion of their income for post-retirement expenses. Experts recommend developing a detailed investment plan and starting investments early to allow sufficient time for money to grow and meet financial goals.
Read More: ADB Raises India’s GDP Growth Forecast For FY25 To 7% On Robust Investment, Consumer Demand
When selecting investment plans for retirement, people typically favour low-risk options, and for good reason. The government also encourages investment in retirement savings schemes, aiming to help individuals build a retirement corpus, especially those not covered by government social security schemes. Retirement savings products also offer several tax benefits. Here, we will discuss two such products: Public Provident Fund (PPF) and National Pension System (NPS).
NPS vs PPF: Comparing both investment options
Investors view both NPS and PPF as excellent retirement investment options, as these schemes are specifically designed to generate wealth for retirement.
PPF is a government-backed investment scheme that offers guaranteed returns, while NPS is a market-linked investment plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS investment has the potential to yield higher returns from a diversified portfolio of market-linked assets that eventually outperform inflation over the long term.
Both these investment plans qualify for deduction benefits under Section 80C of the Income Tax Act. However, NPS holds an advantage over PPF in terms of tax saving, as it allows an additional deduction of up to Rs 50,000 under Section 80 CCD(1B) over and above Rs 1.5 lakh deduction under Section 80C.
What is PPF and why is it popular?
PPF was introduced in 1965 by the government to provide a retirement savings solution for those working in the unorganized sector or those not covered by the Employees’ Provident Fund (EPF) scheme. Accessible through post offices across the country, it aims to widen the reach of this investment avenue. With a 15-year lock-in period and guaranteed interest rates, PPF offers a reliable long-term savings option.
Due to its guaranteed returns, risk-averse individuals often prefer to invest in PPF. Currently, the interest rate on PPF investment is at 7.1 percent.
Who can open PPF account?
A PPF account can be opened by any Indian citizen above 18 years of age. Also, a guardian can open a PPF account on behalf of a minor or someone of unsound mind. However, as per current PPF rules, Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to invest. Joint accounts are also not allowed in the PPF scheme.
Read More: Rupee rises 15 paise to 83.16 against US dollar in early trade
PPF’s tenure and tax benefit
PPF’s tenure is initially fixed for 15 years, and after account maturity, one can either withdraw the entire balance or close the account or extend it for five years with or without contribution. So, you have the option to extend the tenure in blocks of 5 years.
Under Section 80C of the Income Tax Act, the PPF contributions are eligible for a tax deduction. At the time of withdrawal, the interest is exempt from tax. PPF falls under EEE (Exempt, Exempt, Exempt) category, which means that the corpus after maturity is also tax-free. Under Section 80C of the I-T Act, the deduction benefit currently is limited to a maximum investment of Rs 1.5 lakh.
What is National Pension System (NPS)?
NPS is a market-linked voluntary contribution retirement scheme, which consists of both debt and equity. NPS investment helps an investor build a retirement corpus and avail a pension during retirement years. One can open an NPS account between the age of 18 and 60.
The minimum contribution for NPS is set at Rs 500 in Tier I and Rs 1,000 in Tier-II accounts. There is no maximum investment limit fixed for NPS accounts.
Who can open NPS account?
Any Indian citizen, regardless of residency status, can invest in the NPS if the individual meets certain criteria. He or she must be between 18 and 70 years old when submitting the application to the Point of Presence (POP) or Point of Presence-Service Provider (POP-SP). The individual must fulfill the Know Your Customer (KYC) requirements.
NPS tax benefits
NPS subscribers can avail of deduction benefits up to the limit of Rs 1.5 lakh under Section 80C. Additionally, they can get tax exemption of up to Rs 50,000 under Sec 80CCD (1B). On the employer’s contribution towards employees’ NPS account, a deduction under section 80CCD (2) can be claimed but it is capped at up to 10 percent of the basic salary.
Summing Up
NPS and PPF are both quite popular among people when it comes to financial retirement planning. These options have various advantages and features tailored to meet distinct financial goals.
