New Delhi: Building an adequate retirement fund requires consistent investments over a long period of time. You need to set a clear financial goal in terms of retirement fund value. Factoring in inflation and the cost of living in retirement is important before you start. Use this data to chalk out a detailed investment plan and start investing early so that your investments get ample time to grow and meet the target.
When it comes to the choice of investment instruments for retirement savings, people usually stick to low-risk options as they feel they cannot afford to lose anything from their retirement fund. Public Provident Fund (PPF) and National Pension System (NPS) are some of the most popular retirement-oriented schemes.
PPF account helps an investor avail income tax exemption on investment up to Rs 1.5 lakh in a financial year and at the same time, it helps investors enjoy tax benefit on the interest earned and the maturity amount.
Public Provident Fund:
Public Provident Fund or PPF is the most popular long-term investment in India which has been used by people to save for their retirement, children’s education or other long-term goals. It is a solely debt-oriented scheme backed by the government and handover a floating rate of interest of 7.1 percent compounded on an annual basis.
The interest rate offered on the PPF is not fixed and is revised every quarter by the government. The interest rate is compounded on an annual basis. And is calculated based on the minimum balance in the account between the 5th and end of every month.
The tenure of the PPF account is 15 years and after the account maturity, you can either withdraw the entire balance or close the account or extend it for five years with or without contribution. Thus, the tenure can be extended in blocks of 5 years as per your wish.
Under Section 80C of the Income Tax Act, the contributions made in PPF are eligible for a tax deduction. At the time of withdrawal, the interest is exempted from tax. PPF falls under EEE (Exempt, Exempt, Exempt) tax basket. The corpus withdrawn on maturity is also tax-free. But the tax-exemption by 80C is limited to a maximum investment of Rs 1.5 lakhs. Even withdrawals are tax-free.
NPS is totally a voluntary contribution scheme. It is a market-linked scheme which consists of both debt and equity wherein the returns are based on the market performance. The minimum contribution for NPS is set at Rs 500 in Tier I and Rs 1000 in Tier-II accounts. There is no maximum investment limit set for NPS accounts.
In case of NPS, after a subscriber reaches the age of 75, they can withdraw a lump sum of up to 60 per cent from their corpus. However, one of the biggest drawbacks of NPS is that after withdrawal it is compulsory for the rest of the 40 per cent balance to invest in an annuity plan. Partial withdrawals can be made up to 25 per cent of the subscriber’s NPS savings, but only after the 10th year of subscription.
With NPS subscribers enjoy full tax-exemption up to the limit of Rs 1.5 lakh under section 80C. Additionally, subscribers get tax-exemption of up to Rs 50,000 under Sec 80CCD (1B). On the employer’s contribution made towards employees’ NPS account, employees can also claim deduction under section 80CCD (2), of up to 10 per cent of the basic salary plus dearness allowances.
NPS vs PPF: The better retirement option:
While investing for your retirement, you need to consider factors like liquidity, returns, tax benefits, loan benefits, and flexibility to select the appropriate investment product. As NPS is a market-linked product, there are chances of getting a higher real rate of return in comparison to the PPF. However, if you don’t want to invest in an annuity plan, you may not like NPS.
PPF, on the other hand, is strictly for risk-averse investors who are satisfied with low returns whereas NPS also suit investors who are ready to take a little more risk for moderately high returns. PPF allows you to take a loan against it; NPS doesn’t. Therefore you have better liquidity in case of PPF.
Another important thing to consider is that you should avoid investing only in NPS or PPF to build your retirement corpus. You can invest in either or both along with other investment products like equity and debt mutual funds, fixed deposits, and real estate for a more diversified and highly effective investment portfolio.
Make sure you have complete clarity on each investment product and know the associated risks and rewards before taking the plunge. Do not compromise on the long-term approach when it comes to investing for retirement.