PPF vs NPS Calculation: Is it wise to choose National Pension System ahead of Public Provident Fund?

PPF vs NPS: According to tax and investment experts, both are good investment tools to build retirement corpus but if someone has a high risk appetite and want to earn much more, then NPS is better than PPF.

PPF vs NPS calculation: If an investor has a high risk appetite, then an NPS account will give around 2.9 per cent higher return than the PPF at the time of retirement. Photo: Pixabay

PPF vs NPS: The National Pension System or NPS is a voluntary pension contribution system, which is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS investment tool has been created through a parliamentary act. However, while investing in NPS accounts it has been found that people are confused between the Public Provident Fund (PPF) and NPS as both are meant for retirement fund accumulation. According to tax and investment experts, both are good investment tools to build retirement corpus but if someone has a high risk appetite and want to earn much more, then NPS is better than PPF.

PPF vs NPS Confusion
SEBI registered tax and investment expert, Manikaran Singhal said, "Both PPF and NPS are voluntary contribution options. When it comes to choosing either PPF or NPS, people get confused as to which would give them more income tax exemption. Generally, people invest in NPS when their PPF limit of Rs 1.5 lakh under Section 80C is over."

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NPS Options in Brief
Manikaran said that NPS has eight fund managers where one can choose the equity option up to 60 per cent of the investment. And at the time of retirement, one can withdraw 60 per cent of the maturity amount, which is tax-free. Rest 40 per cent would remain in the NPS account for pension funding of the investor and it would be taxable.

Manikaran also added that NPS investment has two options: active mode and auto mode. In the active mode, one can evaluate one's return annually and can switch from equity to debt and debt to equity options. While in auto mode, there would be 8 fund managers handling one's investment and making a switch from debt to equity and vise-versa options on their wit and grit. He said that in NPS, one can have an income tax exemption on investment up to Rs 50,000 under Section 80CCD.

PPF vs Equity Returns Compared
Comparing PPF with NPS Kartik Jhaveri, Manager — Wealth Management at Transcend Consultants said, "Due to the equity exposure in NPS account, if an investor chooses the 50:50 option of the equity and the debt options, in the long-run debt option would give around 8 per cent returns like PPF while the equity exposure would give at least 12 per cent returns in the long-term."

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According to the calculation, that means, if a person invests Rs 100 in NPS and Rs 100 in PPF, he or she would get 7.1 per cent interest rate returns in PPF while in NPS his or her returns would be 10 (6+4 = 10) per cent returns, which is 2.9 per cent higher than the PPF.

Therefore, if an investor has a high risk appetite, then an NPS account will give around 2.9 per cent higher return than the PPF at the time of retirement.

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