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PPF Vs NPS: Which Is A Better Retirement Savings Option For You?

While choosing these instruments, seniors should match their lock-in needs, liquidity, return expectation and risk appetite in sync with their financial goals.

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Outlook Money
November 28, 2023
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SBI Life Saral Pension

Public Provident Fund (PPF) and the National Pension System (NPS) are government-backed long-term, low-risk retirement savings plans. Both are equally popular among the public because of the tax benefits and the opportunity they provide to create wealth with attractive interest rates. So, while choosing these instruments, seniors should match their lock-in needs, liquidity, return expectation, and risk appetite in sync with their financial goals.

Let’s explore how these instruments differ:

Public Provident Fund (PPF)

Currently, PPF offers a 7.10 percent interest rate per annum and is one of the market’s most popular low-risk investment products. The PPF interest rate is revised each quarter.

Investments under PPF get tax exemption up to Rs 1.5 lakh in a financial year under Section 80C of the Income-tax Act 1961. The interest income and the maturity proceeds are also tax-exempt.

PPF has a 15-year lock-in period and is considered one of the safest investment instruments as it offers guaranteed returns in the long term without liquidity concerns. The subscriber can get a loan against the PPF corpus or make partial withdrawals, subject to certain conditions.

When Can You Make A Partial Withdrawal? The account holder can make partial withdrawals from the PPF account after five years, excluding the initial investment year, by submitting Form-2. The partial withdrawal, up to 50 percent of the credit balance, is allowed once a financial year for events like weddings, house renovations, etc., provided there is no outstanding loan against the account. However, if the subscriber needs more than 50 percent of the accumulated money, they can prematurely close the account after five years, excluding the year of account opening.

How Can You Prematurely Close The PPF Account? A PPF account can be closed prematurely under three conditions: if the account holder’s spouse or the children have a life-threatening disease, need money for children’s higher education, or the account holder has moved to a different country or has become a Non-Resident Indian (NRI).

National Pension System (NPS)

NPS is a market-linked savings scheme to build a retirement corpus and receive pensions. It is open to any Indian citizen between 18 and 70. Since it’s a retirement scheme, the subscriber can redeem the money only at the retirement age of 60. This long-term lock-in ensures that the fund is used only for retirement purposes. NPS interest rates are market-linked. As in the PPF, NPS allows partial withdrawals for children’s education, marriage, critical illness, etc.

When signing up for NPS, the subscribers must choose a pension fund manager and an investment strategy, for instance, the “Auto” or “Active” modes, with investment options like equity, corporate debt, government bonds, and alternative investment funds.

On maturity, the subscriber can withdraw 60 percent of the accumulated funds in a lump sum; the rest must be invested in a market-linked annuity or annuities for pension.

Finally, based on the unique features of the two savings plans and the investors’ financial needs, they can opt for PPF or NPS. Both the schemes offer investment protection and tax benefits besides considerable long-term returns

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