NPS vs PPF: Which one is the better Retirement Plan? Improve your Retirement Planning with ETMONEY

Public Provident Fund (PPF) has been one of the most popular options for saving for retirement. However, since its launch, National Pension System (NPS) has also gained popularity thanks to its unique features. So which one should you pick?

In this video, we look at how these fair against each other. We look at their similarities, differences and try to understand with an example which of the two will help you build a big retirement corpus.

It is important to plan for retirement because inflation and increasing life expectancy can create a big dent in your retirement planning by eroding the wealth you have saved over your working life. Two instruments that help you save for retirement are PPF (the traditional option) and NPS (a modern financial instrument). Both these schemes are made available by the government of India and using tax benefits, the government is getting more people to save towards retirement. The tax benefits are offered under Section 80C of the Income Tax Act

👉 Public Provident Fund (PPF)

The PPF scheme was launched in 1968 and was aimed at catering to the unorganized sector for Indian citizens who were not covered on the Employees Provident Fund (EPF) which was a good savings vehicle for the organized section. To ensure, PPF is available to most people, this financial instrument was available via the post office which has a high reach in lakhs of villages and thousands of towns.

The PPF has a 15 year lock-in period and offers a guaranteed interest rate that changes every quarter depending on a government formula. Currently, one can deposit a maximum of ₹1.5 lakh in a financial year. PPF is an apt invest for retirement tool for people who are risk averse and are keen on saving taxes. Tax benefits are offered under Section 80C of the Income Tax Act.

👉 National Pension Scheme (NPS)

The NPS is a market linked retirement planning scheme to which a person can voluntarily subscribe to. The NPS allows you to build a corpus that offers you full life pension and is open to Indian citizens between 18 and 65 years of age. Per the rules of the NPS, one cannot remove the funds before the age of 60 years except in some exceptional scenarios like a critical illness, buying a house, wedding, child's education etc.

We have a rather popular video on Everything about NPS which you can watch on https://www.youtube.com/watch?v=H0452CXiUXc

👉 Common Points between NPS and PPF

The NPS and PPF are both retirement planning financial instruments with a long term focus and a high lock-in period. Both instruments offer tax savings under Section 80C

👉 Differences between NPS and PPF

1. While the PPF offers a guaranteed interest rate (currently 7.9%), the NPS does not offer a guaranteed returns and returns are linked to the equity and bond market.
2. With regards to the lock-in period, the PPF has a lock-in of 15 years while the NPS corpus withdrawl is locked until the subscriber is 60 years of age.
3. With regards to choice, in case of PPF one cannot decide where the money goes. However in case of NPS, one can decide the type of fund and the fund manager who will manage your money
4. PPF corpuse cannot be attached in the case of legal proceedings but it can be done in case of NPS.

👉 NPS of PPF - which one is better?

From a returns standpoint, NPS is better especially if you are young. In the video, we take the example of two young 25 year olds - one invests in PPF and one invests in NPS. Assuming PPF gives an 8% per annum return and NPS offers 10% per annum returns, we see that over 35 years there is a lot of difference in the retirement corpus. In case of PPF, the young man would accumulate only 2.79 crores while in case of NPS, the corpus will swell to 4.7 crores. This is due to the magic of compounding and this is important as your investments should atleast beat inflation.

#NPSvsPPF #RetirementPlanning #TaxSaving

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