There are two things that can make your retirement less than ideal? Inflation and increasing life expectancy. The combination of these two factors means that if you do not save enough, then your retirement days can be stressful.
Due to this reason, the government of India has made retirement savings options available to us. It wants citizens to build a retirement corpus by saving from their own income, especially those individuals who are not covered under government-aided social security schemes. In fact, retirement savings products come with several tax benefits so that more and more people are encouraged to buy them. There are essentially two products meant for retirement savings:
1. Public Provident Fund
2. National Pension System
Both are covered under Section 80C of the income tax act which means you can claim tax deductions up to Rs 1.5 lakh by investing in any of the products.
In this blog, we have drawn a comparison between the National Pension System and Public Provident Fund, to find out which is a better option to build a retirement corpus. But, before that let's look into their features.
What is Public Provident Fund (PPF)?
This scheme was launched by the government in 1965. The main thought behind this product was that people who work in the unorganized sector or are not covered under the Employees' Provident Fund scheme can invest in PPF to build their retirement corpus. This scheme has been made available in post offices across the country so that more and more citizens can have access to this investment option. This long-term saving option comes with a 15-year lock-in period and a guaranteed interest on the invested money. The PPF tax benefit makes it a desirable product. Every financial year, you can save up to Rs 1.5 lakh by investing in PPF and claim deductions for the same under Section 80C.
Since PPF provides guaranteed returns, people who are more risk-averse prefer to invest in this product. Currently, PPF interest rate is 7.1 percent.
What is National Pension System (NPS)?
It is a market-linked voluntary contribution retirement scheme. By investing in NPS you can build a retirement corpus and avail pension amount during your retirement years, and any Indian national between the age of 18 and 65 can join it.
Since it's a retirement scheme, an investor can't redeem his money before the age of 60. A long-term lock-in period ensures that the money is used only for post-retirement purposes. While most people think NPS interest rates are fixed, it is a market-linked product.
As per NPS withdrawal rule, partial withdrawal is allowed for specific needs like children's education, children's marriage, critical illness.
Now, let's see which is a better investment option
If you are talking about retirement savings, NPS is a better option than PPF. Let's illustrate this with an example.
Let's assume, two friends Sanjiv and Sahil started saving Rs 1.5 lakh for their retirement in 2019. Both of them are 25-years-old and want to retire at 60. Also, they plan to continue this investment until 2054, at the time of retirement. However, Sanjeev has invested in NPS and Sahil in PPF.
The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for PPF has been decreasing, at the same time, there are chances that NPS can give you more than 10 percent returns in the future. So, while they reach their retirement age, there is a probability that this difference might increase further.
To sum it up, though both are retirement savings options, in the long-term, a substantial retirement corpus (by beating the inflation) can only be created by investing in market-linked NPS. Its tax benefits combined with the flexibility of how and where your money gets invested to make it an ideal retirement product.
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