Retirement Planning: NPS or PPF?

Retirement is one of the most important things everyone must plan for the simple fact that post-retirement there is zero regular income or low regular income. Though expenses do not stop in the retirement phase. So, it becomes really very important to plan for your retirement. However, many people have already started provisioning for the same indirectly via EPF (Employee Provident Fund) and those who are self-employed are opting PPF (Public Provident Fund) as a provision for their retirement. Even in recent years, NPS (National Pension System) has emerged as a popular choice and is making its own space among investors. PPF and NPS are both popular investment products available in the market that are promoted by government with tax benefits for the same.

PPF is backed by the Government of India and mostly provides a fixed rate which the government announces every quarter. The interest compounding is done annually. Currently, PPFs are providing 8 per cent rate of return with effect from April 1, 2019. For the previous quarter, the same rate was applicable. PPF follows a capital protection strategy and therefore has a conservative approach by usually investing in money market instruments.

NPS is more sort of investment product where it lets its investors decide in which asset class they wish to invest. There are three asset classes available viz. Equity, Corporate debt and Government securities (Popularly known as ECG). They are somewhat similar to mutual funds though, the structure is completely different. Mutual funds tend to be more flexible than NPS. Like mutual funds, NPS also has fund managers. If we look at the average 6-month, 1-year, 3-year and 5-year returns provided by NPS then for Tier 1 account Equity gave 11.94 per cent, 9.81 per cent, 15.24 per cent and 12.40 per cent, respectively. While Corporate debt gave, 7.26 per cent, 6.36 per cent, 8.16 per cent and 10.04 per cent, respectively. Whereas, Government securities gave 9.28 per cent, 6.97 per cent, 8.64 per cent and 11 per cent, respectively. So, assuming you are taking an aggressive approach, you will have a maximum allowable exposure to equity of 75 per cent and remaining 15 per cent in corporate debt and 10 per cent in government securities, the average 6-month, 1-year, 3-year and 5-year returns that you would have received is 10.97 per cent, 9.01 per cent, 13.52 per cent and 11.90 per cent, respectively.

If we simply look at the returns provided, then NPS anytime goes ahead of PPF for the fact that NPS also invest in equities which is not the case with PPF. So, now the question is should you opt for NPS or PPF? The answer to the same is NPS for the fact that they tend to provide you with much more returns than that of PPF. The only advantage of PPF over NPS is its EEE (Exempt Exempt Exempt) tax status as compared to EET (Exempt Exempt Taxable) of NPS. However, overall NPS is a better product as compared to PPF. Though things would change if you are a conservative investor or nearing retirement, as in these cases PPF would better suit you than NPS.