Financial freedom requires planning and patience. This is the first piece of a series of posts on exploring various investment avenues.
As another year comes to an end, it’s important for us to equip you with the best investment ideas. In this series of articles, we’ll discuss the different routes you can take to plan your retirement or strengthen your current financial standing. We’ll try and cover everything that is out there because, more than anything, we want you to start 2024 strong!
In this article, we’ll discuss two government– backed retirement plans. Before getting into the specifics of each, we’d like to make it clear that we won’t be pitting one scheme against the other.
Both Public Provident Fund (PPF) and National Pension Scheme (NPS) encourage you to save regularly and are backed by the government. But the most important difference is that PPF is backed by the government and guarantees a return. While NPS is an investment that is linked to the market and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). While prima facie, the former may look like a safer option, the latter has the potential to generate higher returns due to its exposure to diversified market-linked assets.
Both PPF and NPS are eligible for deduction under Section 80C, but in the case of NPS, apart from Section 80C, you can claim an additional deduction of up to ₹50,000.
Additional Reading: Let’s take a look at the difference between PPF and NPS
What is PPF?
Introduced by the government in 1965, the Public Provident Fund (PPF) was designed to cater to those in the unorganised sector without coverage under the Employees’ Provident Fund (EPF). Now available in post offices nationwide, PPF’s 15-year lock-in period and guaranteed interest make it an attractive long-term savings option. The added perk is its tax benefit – investing in PPF allows you to save up to ₹1.5 lakh annually with tax breaks under Section 80C.
This stability and tax efficiency appeal to risk-averse investors, evident in the current 7.1% return rate. PPF stands out as a secure avenue for those who prioritise guaranteed returns and a tax-smart approach to wealth building.
NOTE: In the past, there were no means to close a PPF account early. Now, there is, but only if the account holder keeps the account open for at least five years before closing it.
Premature closure is permissible in specific situations, such as:
- Meeting expenses for higher education.
- Covering medical costs, particularly for life-threatening illnesses, substantiated by documentation from a medical professional.
Additional information to consider before opening a PPF account:
- Interest is credited annually on the 31st of March.
- To maximise interest, deposits should be made between the 1st and 5th of each month, as interest is calculated based on the lowest amount held (i.e., the amount on the 5th).
- A loan can be availed against your PPF account after a minimum holding period of three years. Complete repayment before the sixth year could make you eligible for another loan.
- Any Indian citizen can invest in PPF. One citizen can have only one PPF account unless the second account is in the name of a minor.
- NRIs and HUFs are not eligible to open a PPF account.
Additional Reading: 5 Ways To Make The Most Of Your PPF Account
What is NPS?
The National Pension System (NPS) is a voluntary retirement plan linked to the market, allowing individuals to build a retirement fund and receive a pension upon retirement. Open to all Indian citizens aged 18 to 65, the scheme enforces a long-term lock-in period until the individual turns 60, emphasising its purpose for post-retirement needs.
Contrary to common belief, NPS interest rates are market-driven and not fixed. This adaptability aligns with market fluctuations. While withdrawals before the age of 60 are restricted, certain exceptions apply, such as funding your children’s education, weddings, or addressing serious illnesses, as per NPS withdrawal rules.
Additional Reading: Why Should You Choose NPS As A Tax-Saving Investment?
Key Differences:
| PPF | NPS | |
| Risk & Safety | PPF boasts entirely government-backed security, ensuring nearly risk-free returns. | NPS is market-linked and carries some risk, it is meticulously regulated by the PFRDA, minimising the possibility of malpractices. |
| Returns | PPF provides low but stable returns around 7-8%. | NPS can give up to 10% in some cases. |
| Liquidity | PPF permits partial withdrawal post a specific lock-in period and within a defined amount limit. | NPS offers slightly higher liquidity through multiple opportunities for partial withdrawal. |
| Taxation | PPF is under the EEE or exempt-exempt-exempt category. | NPS balance withdrawn on maturity is tax free whereas annuity must be purchased after paying taxes. |
PPF or NPS?
Rather, than choosing between NPS and PPF, we recommend you plan your budget in such a way that you are able to invest in both these schemes. After all, the lack of access to immediate liquidity ensures that you are protected from your own impulses. And most importantly, as mentioned earlier, both these schemes are backed by the government and comes with tax benefits.
What’s often overlooked is the link between these investments and Credit Score. Both PPF and NPS, reflect financial responsibility and foresight, which is why we strongly recommend that before beginning to make any financial plan, start by checking your Credit Score regularly.