National Pension System: Why you should choose NPS ahead of PPF

National Pension System: The National Pension System or NPS is a voluntary pension contribution system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The investment vehicle has been created through a parliamentary act. However, while investing in NPS it has been found that people are confused between the Public Provident Fund (PPF) and NPS as both are meant for retirement fund accumulation.

Speaking on how the NPS is different from the PPF, Manikaran Singh, a SEBI registered tax and investment expert said, "Both PPF and NPS are voluntary contribution option made available by the recruiter if the income taxpayer is a salaried individual. However, when it comes to choosing either of PPF or NPS, people get confused as to which would give them more income tax exemption. Generally, people invest in NPS when their PPF limit of Rs 1.5 lakh under Section 80C is over." Manikaran said that NPS has eight fund managers where one can choose the equity option up to 60 per cent of his or her investment. And at the time of retirement, one can withdraw 60 per cent of the maturity amount, which is tax-free. Rest 40 per cent would remain in the NPS account for pension funding of the investor and it would be taxable.

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Manikaran also added that NPS investment has two options: active mode and auto mode. In active mode, one can evaluate one's return annually and can switch from equity to debt and debt to equity options. While in auto mode, there would be 8 fund managers handling one's investment and making a switch from debt to equity and vise versa options on their wit and grit. He said that in NPS, one can have an income tax exemption on NPS investment up to Rs 50,000 under Section 80CCD.

Comparing PPF with NPS Kartik Jhaveri, Manager — Wealth Management at Transcent Consultants said, "A recruiter, especially the government of India or the state government, gives its employees option between the PPF and the NPS. Some of the private companies are also offering such an option to their employees. Since NPS has an annuity option, it's always better to go for the NPs instead of the PPF. The benefit of choosing the NPS is maximisation of the investment while in PPF, it is completely dependent on the interest rate." 

He said that due to the equity exposure, if someone chooses the 50:50 option of the equity and the debt options, in long run debt option would give around 8 per cent returns like PPF while the equity exposure would give at least 12 per cent returns in the long-term. Means, if a person invests Rs 100 in NPS and Rs 100 in PPF, he or she would get 8 per cent returns in PPF while in NPS his or her returns would be 10 (6+4 = 10) per cent returns, which is 2 per cent higher than the PPF. 

However, he said that investing in NPS for income tax benefit is not wise because even after paying income tax on Rs 50,000, if someone invests it in the equity mutual funds for the same period of time, he or she would get much better returns than the NPS, if his or her risk appetite is high.