Investors who are trying to choose between NPS and PPF as retirement savings options should also give careful consideration to ELSS funds
One of the questions that savers have started asking more often is about choosing between the National Pension System (NPS) and Public Provident Fund (PPF). It's not an unreasonable question to ask. Superficially, at the time that you make the investment, both schemes serve the same purpose. At the end of the financial year, when savers are generally scrambling to exhaust their tax-saving quota, they are exactly equivalent. They are also alternatives because both come out of the same Rs 1 lakh tax saving limit under Section 80C.
One of the questions that savers have started asking more often is about choosing between the National Pension System (NPS) and Public Provident Fund (PPF). It's not an unreasonable question to ask. Superficially, at the time that you make the investment, both schemes serve the same purpose. At the end of the financial year, when savers are generally scrambling to exhaust their tax-saving quota, they are exactly equivalent. They are also alternatives because both come out of the same Rs 1 lakh tax saving limit under Section 80C.
However, that's as far as the similarity goes. Savers who are asking which of the two to invest in would do well to understand that beyond the initial tax saving, the two schemes are chalk and cheese. Most people understand PPF because it is essentially a variant of the good old fixed deposit, except that it's made with the central government. The deposit is locked till the sixteenth year, although partial withdrawals are allowed from the seventh year onwards. The interest earned and the withdrawn principal are completely tax-free. The interest is adjusted every year and is generally slightly lower than the prevailing bank FD rate. Of course, on a post-tax basis, the PPF earns more than the bank FD. All in all, a simple product to understand.
The NPS is a very different beast. It is designed purely as a retirement savings system. Therefore, the money is locked in till the age of 60. Even at retirement, you can't take the entire thing as a lump sum. At least 40 per cent of the value at the time of retirement must be invested in an insurance company's annuity product which will provide you with a lifelong regular income. By far the biggest difference is in the accumulation stage. NPS is a market-linked product. The money is not with the government but with designated fund managers, which you can choose between. You can also choose between different funds as investment options, some of which invest in fixed income but others invest in equities. Up to fifty per cent of your assets can be in equities.
Equity investments are the great advantage that the NPS has. While equity investments can be volatile, over the long horizons of a typical NPS investment, they are likely to generate much higher returns than fixed income securities. With PPF, the rate of return is rarely much above the consumer inflation rate. The real rate of return is generally either slightly above or slightly below zero. And in any case, the official consumer inflation rate is generally lower than the personal inflation rate that most of us face. Effectively, money left in fixed income securities over long period declines in value. Since a substantial part of our retirement savings (PF etc) tends to be in fixed income, adding some equity is a good idea for everyone.
The fly in the NPS ointment is taxation and withdrawal limits. In it's infinite wisdom, the government has made income from NPS taxable, thus giving it a big disadvantage over all other forms of retirement and tax-saving investments. Whenever you withdraw money from the NPS, the returns will be taxed as capital gains. The income from the annuity is also taxable. There are also some other rules governing withdrawals from NPS. Even though the actual impact of taxation may be moderated because of cost indexation, taxability and other complexities are issues that savers should be aware of.
Interestingly, cleanest equity-backed retirement saving solution could actually be the plain old ELSS mutual funds. Even though their management cost is higher than NPS funds, as equity investments, neither is there any tax liability on withdrawal nor is there any other limitation. At the time of investment too, they offer exactly the same tax-savings a PPF or NPS, along with a much shorter lock-in period of three years. While the short lock-in might make it tempting to withdraw them early, not only are ELSS funds a perfectly viable retirement savings option, they have some distinct advantages over others.
Reff:https://www.valueresearchonline.com/
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