Understanding the Benefits of NPS and PPF for Retirement

Every working individual dreams of living a comfortable and worry-free retirement life. This can only become a reality with strategic retirement planning. Whether you’re working in an start up or employed in a top MNC, you must invest in secure retirement plans in India that align with your retirement goals.

It will ensure you receive a steady income post-retirement. While there are numerous retirement plans in India, NPS and PPF are the most popular choices. These government-backed retirement schemes have a lot in common, yet there are differences too.

Not knowing the specific benefits of each may result in making suboptimal choices that significantly lower the retirement funds. This article highlights a clear NPS and PPF comparison, along with fundamentals and clear benefits, so you can plan and invest correctly for optimal gains.

Overview of NPS and PPF

NPS is a voluntary pension system for all Indian citizens, including NRIs and OCIs. It is currently regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is considered one of the best market-linked defined contribution schemes that enable people to build their retirement income and save tax. Many people are drawn to this scheme because of the lucrative NPS tax benefits that we will discuss later in this article.

For risk-averse individuals, PPF is typically the first consideration for retirement planning in India. It is one of the oldest long-term savings schemes regulated by the Ministry of Finance that provides guaranteed returns. Unlike NPS, your PPF investment isn’t affected by market volatility, making it a safe retirement plan for conservative investors who want assured retirement funds.

Key Benefits of NPS

• Flexibility

If you assess NPS vs. PPF regarding flexibility, NPS clearly wins. It allows you to decide how much of the invested amount you want to allocate to equity, corporate debt, government bonds, and alternative investment funds.

• Tax Benefits

Self-employed individuals can avail NPS tax benefits u/s 80CCD (1). They are eligible for tax deductions up to 20% of their gross income, with a ceiling of ₹1.50 lakh u/s 80 CCE. An additional deduction of ₹50, 000 is allowed over the ₹1.50 lakh limit u/s 80 CCE.

If you’re an employed individual, you can claim up to 10% of salary (basic + DA) u/s 80 CCD (1) on your contribution as deduction, with a ceiling of ₹1.50 lakh limit u/s 80 CCE, and an additional  ₹50, 000 u/s 80 CCD (1B).

• Low Cost

Besides the generous NPS tax benefits, this scheme also provides the lowest account maintenance costs. For example, the annual Permanent Retirement Account (PRA) maintenance charge per account by CRA is ₹69, a charge per transaction is ₹3.75, etc. Such low costs make NPS a relatively affordable retirement product compared to other similar options.

• Portability

In the NPS vs. PPF comparison, NPS provides greater ease of portability. Whether you’re switching to a new company in a new city or changing your career path altogether, you can continue using the same PRAN for convenience. All NPS accounts can be easily transferred across locations and employment, provided you update the details linked to your PRAN.

Key Benefits of PPF

• Safety and Security

Conservative investors often include PPF in their retirement planning in India because of its assured returns. Since the government sets PPF account rates, investors can expect risk-free and guaranteed returns.

• Tax-free Returns

While NPS tax benefits are limited, PPF provides full tax exemption on the maturity and earned interest amount. You can also claim a tax deduction on the PPF contribution in a financial year u/s 80C, subject to a maximum of ₹1.50 lakh.  

• Long-term Savings

PPFs have a lock-in period of 15 years to support long-term financial goals during retirement. Working individuals in their mid-30s and 40s should include PPF in their retirement planning in India because it will give them a guaranteed and steady monthly income post-retirement. Avoid making partial or early withdrawals before the maturity period to get optimal returns.

• Loan Facility

PPFs have a long lock-in period and partial withdrawals cannot be made in the first six years. However, you can take a loan against your accumulated PPF balance if you need urgent funds during this phase. You can get a loan between the 3rd and 6th year. The loan amount cannot exceed 25% of the PPF balance available two years before placing a loan application.

Comparing NPS and PPF

• Risk and Returns

If you’re evaluating the NPS vs. PPF option from a risk perspective, PPF emerges as the safest option. Since PPF is backed and regulated by the Ministry of Finance, investors can rest assured of receiving guaranteed and risk-free funds during retirement. NPS is a better option for more risk-tolerant individuals because all NPS returns are market-linked, making them volatile. Since risk and returns are directly proportional, NPS has a relatively greater potential to generate higher returns than PPF.

• Suitability

Investors wanting assured, steady, risk-free retirement funds must choose PPF over NPS. Those with a risk-taking appetite can consider investing in NPS for potentially higher returns. You can explore our retirement plans to find options aligned to your risk appetite and retirement goals.

• Diversification

The best part about retirement planning in India is that you can create a diversified retirement plan that provides a healthy mix of safety, higher returns, and flexibility. Instead of relying only on PPF or NPS, you can allocate your investment in both plans according to your risk profile. You can also include financial products from our retirement and investment plans to diversify your retirement planning.

How to Maximize Benefits?

• Investment Strategy

We recommend investing in NPS and PPF early in your career to benefit from compounding growth. You can also set a monthly or quarterly contribution schedule instead of lump-sum yearly payments to avoid market timing risks and smooth out price fluctuations in NPS’s equity component. To enjoy optimal returns, avoid early withdrawals to prevent tax implications.

• Tax Planning

If you have invested in NPS, we recommend withdrawing up to 60% on maturity and using the remaining balance to buy the best annuity plan, like our Immediate Annuity Plus plan. Such withdrawals will be tax-free, and the annuity purchase will create more avenues for steady income throughout your retirement. 
PPF account holders must avoid withdrawing any amount in the first five years; otherwise, it will be taxed as normal income. Keep your PPF untouched for 15 years and enjoy full withdrawal at zero tax, including tax-free interest income.

• Regular Reviews

Investments in retirement plans require constant monitoring and adjustment, especially if you’re investing in NPS. If your income and risk appetite increases, consider reassessing your asset allocation for potentially higher returns. You can also invest in other retirement insurance plans that further support your retirement goals.

Secure Your Retirement with Shriram Life Insurance

Planning early for retirement isn’t just a wise decision but an essential one. Knowing the fundamentals isn’t enough if you want to invest in retirement plans in India like NPS and PPF. You must know the precise benefits of each plan, including their tax implications and key differentiator points, to make informed investment decisions. It will ensure you receive a predictable and steady income throughout your retirement. 

While investing in both schemes is a better choice from a diversification perspective, it is also ideal for supporting a worry-free and comfortable retirement. You can plan your retirement with Shriram Life Insurance because we offer a wide range of retirement, protection, investment, and savings plans that can help you achieve financial freedom in your post-retirement phase.