In the current uncertain times, when it is being difficult to meet our present needs, to plan for future needs such as for our sunset years, one needs an even more meticulous planning. Now the financial planning which has to be based on 3 aspects, namely term or the horizon we have, quantum of the finance i.e. needed after a certain term as well as the risk appetite, we need to align in a similar way for retirement planning.
So, depending on your age and the degree of risk you can afford to take you can choose out of the 2 investment options i.e. PPF or NPS. Now, PPF or public provident fund is a sovereign backed instrument and no risk. The only drawback here is that it is a long term investment instrument which provides for redemption option during some of the specified exigencies.
Now on the other hand, NPS which can offer a higher return also has a degree of risk attached to it as it is a market linked instrument. In the case of NPS, PFRDA appointed fund managers manage the fund for a fee.
In the case of NPS, there is offered an additional rebate in tax by investing additional Rs. 50000 under section 80CCD. This is in addition to Rs. 1.5 lakh rebate offered under section 80C. The return that you get on your PPF is completely tax-free, but you can not invest more than Rs 1.5 lakh in any financial year.
So, effectively by investing in this instrument, one can get a rebate of up to Rs. 2 lakh in a year.
PPF is a fixed return fetching instrument with current interest rate at 7.1 percent. While NPS which invests into equity and debt and if one opts for the 50:50 option for debt and equity then in the long run while the debt investment shall fetch 8 percent, equity will offer 12 percent. So, the overall return on an average shall be 10%, more than what PPF would fetch given the current rate of 7.1%. So, the NPS instrument can offer 2.9% higher return in comparison to PPF.
As per experts, one can opt for both or either of thee retirement avenues but needs to have a higher risk profile for considering investment into NPS. Also, should be prepared for a higher lock-in in case of NPS.
So, a person wanting a higher return in comparison to PPF plus who can afford a higher risk can also include NPS in addition to PPF.