NPS vs PPF: Plan your retirement with Income Tax savings; find out which one is better?

PPF (Public Provident Fund) and NPS (National Pension Scheme) are mainly known as retirement-oriented savings tools and ultimately serve the same purpose. But, the ground zero reality is different. Most of the investment experts say that for an investor who wants flexibility in investment, PPF is a better option but for those who are investing only for their retirement, NPS is better as it yields around 10 per cent post-tax return. Incidentally, investors opt for such products to save tax. Both the options are eligible for Tax deduction under section 80C of the Income Tax Act (ITA). Under section 80C, the maximum investment allowed in PPF is Rs 1.50 Lakh per annum. Additionally, an investor can invest in NPS under sec 80CCD (1B) up to a maximum of Rs 50,000 per annum. However, if we compare it with the normal PPF instead of PPF with ELSS offering, we found the later one is better as it maximises the return post-retirement or after 60 years of age.

Highlighting the benefit while opting for PPF or NPS, Milin Shah, Head - Product Development & Planning at HappynessFactory said, "NPS is a product where one invests till 60 years of age with the option to invest till the age of 70 years. Post-retirement, the rule says that one can withdraw approximately 60 per cent of corpus as lumpsum without any tax impact and the remaining 40 per cent will be in the form of an Annuity and will be taxable, just like any other income." 

He added that the NPS allows an investor to diversify his or her portfolio between Equity, Government Securities and Fixed income instruments. "An investor can invest up to 75 per cent in Equity funds and this is a great advantage of NPS. While equity investments can be volatile, over the long horizons of a typical NPS investment, they are likely to generate higher returns than fixed income securities (Like PPF)," said Shah.

Talking about the Ideal investment strategy in regard to PPF and NPS, Shah said, "Ideally, investors should choose an option depending upon their life situation and risk appetite. Someone, with a long investment time frame, can also look at investing in Equity Linked Saving Scheme offered by mutual funds (ELSS). ELSS are eligible for tax saving up to an investment of Rs.1.50 Lakh just like PPF."

Detailing the flexibility benefits in NPS against the PPF investment Kartik Jhaveri, Director — Wealth Management at Transcent Consultants said, "In PPF, an investor can't invest beyond Rs 1.5 lakh while in NPS an investor can invest any amount though he or she can claim tax benefit up to Rs 50,000 in one financial year." He said that in PPF, an investor has more flexibility as he or she can stop investment after 5 years and can withdraw the whole amount after 15 years while in NPS the whole amount is strictly fixed for a long period till the investor attains 60 years of age and the investor can't fish out the amount in between.

Speaking on the features of the PPF and NPS Kartik Jhaveri of Transcent Consultants said, "PPF account matures after completion of 15 years. One may extend the term after 15 years by a block of another 5 years with or without making additional contributions. The maturity amount of PPF is 100 per cent tax-free. PPF is a 100 per cent Debt oriented product, guaranteed by the government, providing safety of capital. The current annual interest rate on PPF is 8 per cent."