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PPF or NPS: Where to invest to save tax under section 80C?
September, 13th 2021

Investments in the Public Provident Fund (PPF) and the National Pension System (NPS) are meant for your long-term goals. While the entire PPF maturity amount or the partial withdrawal from the scheme may be utilised as per one’s needs, NPS gives you the option to withdraw up to 60 per cent of corpus, and thereafter, annuity or pension is paid on the balance.

Even though both of them come with tax benefits under section 80C of the Income Tax Act, 1961, they are structured differently and therefore a comparison between them may not help much. Each has its own advantages and can be supplemented to achieve long-term goals, primarily being retirement. Rather than trying to figure out which is better between PPF and NPS, make the best use of both PPF and NPS in accumulating a sizable corpus over the long term. To make it an informed buying decision it’s, however, important to know the difference between PPF and NPS. Here are some of them.

About PPF Account

PPF is a 15-year savings scheme earning a fixed return till maturity and so that makes it a debt asset. The interest rate, however, keep varying as per the rate set by the government at the start of each quarter of the financial year. Currently, the interest rate of PPF is 7.1 per cent per annum compounded annually.

Under PPF, you can save anywhere between Rs 500 and Rs 1.5 lakh a year. At an assumed interest rate of 7.1 per cent per annum ( assuming it remains the same till 15 years), by investing Rs 1.5 lakh every year for 15 years, the maturity amount is about Rs 40.68 lakh.

The PPF maturity amount is tax free and one may extend the tenure in block of 5 years after PPF matures. PPF essentially helps you to accumulate tax-free corpus and its annual compounding helps in generating cash even in years when your contribution is low.

Currently, the nominal rate of interest is low in PPF, compared to rates in earlier years. However, considering the inflation and the pre-tax return of PPF, investing in PPF is still a recommended option to save through debt assets.

About NPS Scheme

NPS is a typical retirement focussed investment scheme as it comes with compulsory pension. After opening an NPS account, one has to keep investing and at age 60 the scheme matures. On NPS maturity, one can withdraw up to 60 per cent of the corpus as tax-free money. The balance amount has to be mandatorily handed-over to a life insurance company to start getting life time pension. The pension is taxable in the hands of the annuitant in the year of receipt.

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During the accumulation phase till age 60, there are different fund options to choose from. So, unlike PPF, the returns are not fixed but linked to the performance of assets such as equity and debt. From equities to debt to a mix of equity and debt assets, the NPS subscriber can choose to invest in the assets he or she likes.

As an Investor

It’s better not to look at PPF and NPS from a tax angle only. Creating a tax-free corpus through PPF helps especially when one has retired and wants to keep the tax liability at minimum. Similarly, estimate how much of retirement corpus is required after you retire. Use NPS to save a portion of the savings for retirement needs. A healthy mix of equity mutual funds, PPF and NPS can help you meet your post retirement needs comfortably.

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