Investing in NPS or PPF: Which is better for building your retirement corpus?

In India, when it comes to securing a financially stable retirement plan, the National Pension System (NPS) and the Public Provident Fund (PPF) are the two most popular options. But the real dilemma is which one truly helps you build a stronger retirement corpus for the future? Let's make it easy for you to understand these options better.

Understanding NPS and its benefits?

The National Pension System is regulated by PFRDA, designed to provide financial security for all post-retirement. It offers multiple benefits like market-linked returns, tax savings, and flexibility to choose the fund manager offering fund managing services. One of the biggest advantages of NPS is tax benefits with deductions of up to ₹1.5 lakh under section 80CCD (1) and an additional ₹50,000 under section 80CCD (1B).

How is NPS better than PPF?

The Public Provident Fund (PPF) is a long-term savings scheme backed by the government, offering guaranteed returns (interest rate currently around 7.1%) and tax exemptions under section 80C for investments, interest earned & maturity by following the EEE (Exempt-Exempt-Exempt) tax regime rule. While NPS provides market-linked returns meaning higher potential returns (interest rate 8-12%) in the long run with multiple tax benefits up to ₹ 2 lakh.

Investors can also choose from different investment choices based on their risk appetite and select the national pension scheme pran, which serves as a unique identifier for their NPS account. Moreover, with the help of national pension calculator, NPS subscribers can calculate the estimate of their future pension.

 NPS and PPF withdrawal options and lock-in periods

Generally, the PPF comes with a 15-year lock-in period, extendable in 5-year blocks, meanwhile, NPS has a longer lock-in period than PPF. An individual can make a partial exist after 3 years, withdrawing up to 25% of the total amount invested under PPF or NPS. (Source)  

There is no lock-in period for the NPS Tier 2 accounts. The NPS partial withdrawals are permitted under specific conditions. Upon retirement, up to 60% of the NPS corpus is tax-free, while the remaining 40% must be used to purchase an annuity. Unlike PPF, 100% lump sum withdrawals are not allowed in the National Pension System (NPS).

Conclusion

Both NPS and PPF have unique advantages. If you're seeking potentially higher returns and are comfortable with market-linked investments, NPS is a smart option. However, if prefer assured returns with tax-free benefits, the PPF stands out. Choosing between NPS and PPF depends on individual financial goals, but those opting for a stronger & stable retirement corpus may find NPS an ideal choice.

For a detailed understanding and personalized advice, visit ICICI Prudential Pension Funds.

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