Self-employed individuals have fewer pension schemes available to them for building a retirement corpus. As compared to salaried employees, they are at a disadvantage as they do not get the benefit of an Employees’ Provident Fund (EPF). However, there are two long-term investment options – the Public Provident Fund (PPF) and the National Pension System – that they can rely upon to build a retirement corpus. Since there is always a debate about which one to invest PPF Or NPS. Let’s explore the features of these two government schemes to see which one suits them better.
Also Read: When Can You Withdraw Funds From Your PPF Account?
Public Provident Fund
PPF is a government-backed savings scheme that allows a subscriber to contribute anything between Rs 500 and Rs 1.5 lakh per annum. It has a 15-year lock-in period, but one can make partial withdrawals after five years. Withdrawal can be made once a year for specific purposes, such as medical emergencies, homebuying, or events such as weddings. The rate of interest is adjusted every quarter. At present, it is offering a rate of interest of 7.1 percent per annum. It is one of the most popular debt instruments and comes with a sovereign guarantee.
National Pension System
NPS is a government-backed market-linked pension scheme that allows you to accumulate money in an organized manner till the age of 60. The minimum investment amount is Rs 1,000 per annum for tier-I accounts. Upon maturity, 60 percent of the corpus can be withdrawn tax-free as a lump sum and 40 percent has to be utilized towards buying an annuity for pension income.
Which Is Better: PPF Or NPS?
Withdrawals: For people who need more liquidity and may have to make withdrawals, PPF is a better option as it allows for partial withdrawal after five years. But NPS allows withdrawals 15 years after opening the account.
Tax Efficiency: Tax exemption is better in PPF as one gets tax exemption up to Rs 1.5 lakh in a financial year under Section 80C of the Income-tax Act 1961 under the old tax regime. Though NPS also offers a tax benefit of Rs 1.5 lakh under Section 80CCD (1) within the overall limit of Section 80CCE and a further tax exemption of Rs 50,000 per annum (tier I) under Section 80CCD (1B), the maturity proceeds from NPS are not fully tax exempt.
PPF comes under the EEE category, which means that the investment, the interest as well as the maturity proceeds are tax-exempt. In the case of NPS, only 60 percent of the corpus which can be withdrawn as a lump sum, is tax-exempt, and the balance 40 percent has to be used for buying taxable annuity.
For self-employed people, both are good options, but since investments have to be tailor-made according to one’s unique requirements, the choice between PPF and NPS should be made in accordance with one’s specific needs and goals.
PPF is fully tax-exempt and allows for partial withdrawal. But for individuals, who want to grow their money in the market-linked pension scheme and have separate funds earmarked for emergencies or otherwise, NPS could be a better choice. The withdrawal rules in NPS are rigid but it provides financial discipline to invest money in an organised way. The returns are also comparatively higher if one chooses to invest the bulk of the NPS contribution in equity assets.
The best option would be to research the two schemes and assess your own needs and that of your family, and time period when you would require the funds. Also, take into account factors such as your expenses and the monthly contributions you can make.