Saving for one’s retirement is an extremely crucial financial goal. The best way to save for retirement is to go for long-term small but regular investments. For this, the National Pension System (NPS) and the Public Provident Fund (PPF) are two commonly used products.
Here is a look at each of these products in detail and who should invest in them while saving for retirement
i) Who can invest?
NPS: When NPS was first launched in January 2004 it was only available to government employees, however, it was then extended to all Indian citizens in May 2009. There are three broader categories in which people can subscribe to NPS. One is the statutory contribution by government employees, second is the contribution by corporate employees, and the third is on a voluntary basis open to all citizens. NRIs can invest in NPS.
PPF: All resident Indians can invest in PPF. NRIs are not allowed to invest in PPF.
ii) Eligible age of investment
NPS: Minimum age of investment is 18 years and maximum age one can join is 65 years.
PPF: There is no age restriction. Even minors can invest in PPF along with a guardian.
iii) Nature of returns
PPF: PPF gives you a fixed rate of interest which can change every quarter and is decided by a committee based on changes in the rates of government securities.
NPS: Investors can choose from investment options such as equity, government securities and corporate bonds. As these are a market-linked investment, the return on your NPS investment is not fixed.
iv) Rate of return
PPF: PPF is known to give one of the highest returns among government-backed investment options. The interest rate of PPF can change every quarter and is decided by a committee based on changes in the rates of government securities during a particular quarter. The current PPF interest rate is 7.1% for the quarter ending March 31, 2021.
NPS: NPS investors, on the other hand, get the option to benefit from higher return by investing in a mix of equities, corporate bonds and government securities. The returns are completely market-driven and dependent upon your fund manager’s performance and the asset mix that you select.
The average trailing annual returns as of February 5, 2021, of all Tier 1 equity funds taken together is 23.39% for 1 year, 15.08% for 5 years and 11.47% for 10 years period. Similarly, corporate bonds have also given good return as it is 11.24% for 1 year, 9.59% for 5 years and 10.21% for a 10-year period. For government securities the average annual return for 1 year is 10.07%, for 5 years it is 10.57% and for 10 years it is 9.73%.
v) Period of investment
PPF: The maturity period of a PPF account is 15 years. You can extend your PPF investment beyond 15 years in blocks of 5 years for an unlimited number of times.
NPS: Since the NPS is a focused retirement product, one must remain invested till the vesting age of 60 years. You can continue your NPS account till the age of 70 years.
vi) Quantum of regular investment
PPF: In PPF you have to invest a minimum of Rs 500 while the maximum investment can be Rs 1.5 lakh in any given financial year. Failure to deposit the minimum amount of Rs 500 per financial year leads to the PPF account being designated ‘inactive’.
NPS: In NPS all government employees, whether with the state government or the central government (except the Armed Forces), who joined the service on January 1, 2004, or later, contribute 10% of the basic salary plus dearness allowance. This contribution is typically matched by the state governments. The central government, on the other hand, contributes 14%. However, in the corporate sector, it is typically 10% of the basic salary is contributed by the employee which is often matched by the employer. When it comes to voluntary contribution in NPS by self-employed, it should not be more than 10% of gross total annual income. There is no bar on the timing and frequency of investment.
vii) Maturity payment
PPF: In PPF you get the entire investment and accumulated return as a lump-sum amount after the 15-year period.
NPS: In NPS, at the time of retirement, you must invest a minimum of 40% of your accumulated corpus in purchasing an annuity plan that gives regular income. You can withdraw the maximum of up to 60% of your corpus as a lump sum.
PPF: PPF investment is backed by the government and hence carries a low level of risk.
NPS: NPS is managed by the NPS trust set up by the pension fund regulator, PFRDA, which is governed by the government. The funds that are invested by NPS subscribers are managed by public and private fund management companies appointed by PFRDA. Though fund management is left open to funding managers, they are tightly regulated and regularly monitored by PFRDA. So, when it comes to the safety of your investment in NPS, it will have market driver risk.
ix) Tax saving
Both PPF and NPS gives you tax deduction benefit of Rs 1.5 lakh in each financial year.
PPF: The return that you get on your PPF is completely tax-free, but you can not invest more than Rs 1.5 lakh in any financial year.
NPS: Over and above the Rs 1.5 lakh investment under section 80CCD1, NPS gives you an additional deduction of Rs 50, 000 under section 80CCD(1B). So effectively you can get a deduction of Rs 2 lakh each year if you invest this amount in NPS.
Under NPS, the lump sum maturity amount up to 60% of your retirement corpus that you get is exempted from tax, however, the annuity income that you get monthly is taxable income.
x) Where to open an account
PPF: PPF account can be opened at designated branches of India Post and banks. Many banks also offer online facility both for opening a PPF account and making investments.
NPS: If you are investing in NPS as part of the salary, you can open the account through your employer. If you are new to NPS, then for the voluntary investment you can open an NPS account with a Point of Presence (PoP) or online through eNPS. These PoPs are typically banks, brokerage houses and other financial intermediaries. You can find the list of nearest PoP on https://www.npscra.nsdl.co.in/pop-sp.php
xi) Where should you invest?
Both products have their unique strengths and weaknesses which you should look into before investing. While PPF gives you one of the highest returns in the fixed income category, equities are known to deliver a much higher return in the long term. Looking at the historical return, one can see that when it comes to absolute return, PPF cannot match up to the returns delivered by NPS so far which are mostly in double digits.
When it comes to maturity, NPS investment has a big disadvantage as you do not get the entire amount as a lump sum and must buy an annuity with 40% of the corpus. Annuities are known to deliver low returns. However, the additional tax saving that you can do with NPS can compensate with the higher effective corpus.
If you invest Rs 10,000 per month for 30 years you can accumulate a corpus of Rs 1.41 crore in PPF assuming an annual rate of return of 8%, while investment in NPS can give you a corpus of Rs 2.06 crore if the compounded annual growth rate of your investment remains 10%. So, if you are in a higher tax bracket, NPS offers you an avenue to build a tax-efficient retirement corpus.
If your retirement goal requires a much higher contribution, then you can use PPF for the fixed income part of the portfolio and NPS for market-linked returns. If you have less than 15 years left to your retirement, then PPF may not work for you while you can still go for NPS.