Retirement planning: PPF, NPS help in Income Tax savings - Which is better investment option?

Public Provident Fund (PPF) and National Pension System (NPS) are generally considered retirement-oriented savings vehicles. But, both schemes serve people with different goals. Investment experts believe that PPF suits those investors who want flexibility in their investment while NPS is better for those who are investing purely for their retirement. The latter yields around 10 per cent post-tax return. Typically, investors opt for such products to save tax. Both the options are eligible for Tax deduction under section 80C of the Income Tax Act. 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.

Speaking on the flexibility benefits in NPS against PPF, 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.

Standing in sync with Kartik Jhaveri's views, SEBI registered investment expert Jitendra Solanki said, "In NPS, it is mandatory for an investor to buy annuity worth 40 per cent of his or her investment. However, in a long-term perspective, the NPS gives a better return. So, if an investor is looking for his retirement corpus only, then NPS is a better option but if an investor is looking for flexibility, as it may cause some emergency funds for his or her child education, then PPF is a better option for such investors." Solanki said that PPF would give around 8 per cent return in long-term while in NPS, one can expect around 10 per cent post-tax return on his or her investment.

Speaking on the features of 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."

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 said 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 Milin Shah of HappynessFactory.

Source: HappynessFactory.in

Talking about the Ideal investment strategy in regard to PPF and NPS Milin Shah of HappynessFactory 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."