It is quite a daunting task to choose the correct retirement planning option. A good retirement and investment tool not only gives great returns on investment but should also be able to generate greater tax benefits and hence maximize the returns.
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If you are a beginner and you are confused about what to choose then we are here to help you. Here are some of the things you should consider before you invest in any of these schemes:
It is a social security scheme launched by the union government to provide an avenue for every citizen to plan and save money for life after retirement. This pension scheme is open for all citizens and people from the government sector, private sectors, as well as self-employed individuals, can invest in this scheme. The scheme encourages people to save money for their retirement years and thus you can make periodic payments to this account during your service years.
On maturity of the scheme, the subscribers are liable to receive a percentage of the total corpus in the form of a lump sum. The remaining sum is used to purchase and invest in an annuity plan which promises a monthly pension post-retirement.
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Previously the scheme was only available for central government employees. However, recently the PFRDA has opened the scheme to all citizens and any individual belonging to the age group of 18 above can subscribe to the scheme. The scheme is tax-efficient and comes with tax benefits under section 80C and section 80CCD.
The PPF is a post office savings scheme backed by the central government. It is a long term investment scheme that offers great tax benefits along with better returns. In this scheme, the subscriber can get a good interest income on their deposits. The interest and the principle get compounded annually thus generating greater returns on maturity.
The scheme is ideal for investors who are planning to save money for retirement and have a low-risk appetite. IT offers safety of deposits and the maturity proceeds are fully tax-free. Moreover, you can avail tax deduction under section 80C and no tax is deducted on the amount of interest earned. However, your deposits will be locked-in for 15 years. The investors have the flexibility to invest a lump sum or make 12 monthly contributions. The maximum investment is capped at Rs. 1.5 lakh per year which means you can either pay a lump sum of 1.5 lakh annually or make maximum monthly contributions of Rs. 12500.
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From the above points, it is clear that both are long-term investment schemes, meant to save money for retirement. Now let’s try to understand which one is more efficient investment tool for saving retirement corpus:
While the maturity proceeds of NPS have some restrictions on usage, there is no such prescribed use of the maturity proceeds of PPF. A PPF subscriber gets the entire maturity amount in the form of lump-sum whereas in case of NPS only 60% of the maturity proceeds are given to the subscriber and the remaining 40% is used for purchasing an annuity plan. On maturity, the PPF subscriber can use the entire lump sum to invest in stocks or deposit it in FD whereas; NPS subscribers can use only 60% of the total proceeds for investment. This is one of the key differences between the two.
While both NPS and PPF are tax-efficient tools, NPS proves to be a better investment option due to the dual benefits it offers i.e. safety of invested sum and assured returns on investment. Also when the returns of both the schemes are compared, NPS seems more promising than PPF as it dedicates a considerable sum towards equities. This generates higher returns based on the share market fluctuations. On the other hand, PPF promises guaranteed returns as its returns are not based on share market activities. Therefore, NPS investments are capable of generating inflation-beating returns thereby making it an attractive option for individuals wanting to generate a corpus for post-retirement years.
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Also, NPS has a shorter lock-in period, unlike PPF that has a greater lock-in. Also, tax benefits on NPS are greater than PPF where you can avail of an additional tax benefit of Rs. 50,000 along with tax exemptions offered by section 80C of the ITA.
Both investment schemes can prove to be beneficial as different individuals have different financial goals. Now that you have an idea of the pros and cons of both the schemes, you can decide which scheme you should rely on. Choose a scheme that aligns with your investment goals.
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