Creating an appropriate retirement fund needs wise and responsible long-term capital In terms of the worth of the retirement portfolio, you can have a simple financial target. Taking into consideration inflation and the cost of life in retirement, map out a comprehensive investment schedule and start saving soon so that your portfolio can rise and hit the goal. But then when it relates to picking investment vehicles, people typically default to low-risk strategies because they believe they can’t risk sacrificing anything from their retirement portfolio. The Public Provident Fund (PPF) and the National Pension System (NPS) are some of the most common retirement-oriented strategies. As per tax and investment specialists, the PPF account allows an investor to gain income tax deduction for up to Rs 1.5 lakh in a financial year and at the same time allows investors to benefit from tax gains on the PPF interest gained and the maturity level.
Public Provident Fund (PPF)
The Public Provident Fund or PPF is the most common long-term portfolio among the risk-averse investors. The interest rate provided on PPF is not set and does not adjust on a regular basis. The rate is fixed at the beginning of the quarter every year. The current interest rate is 7.1% p.a. The rate of interest is compounded on an annual basis. It is determined on the basis of the minimum balance in the account between the 5th and the end of each month. The term of PPF comes with a period of 15 years and after the maturity of the account, you can either withdraw the surplus or close the account or continue it for five years with or without a deposit. As a result, the tenure can be extended in blocks of 5 years as per your wish. Under Section 80C of the Income Tax Act, depositors can also seek tax benefits. PPF comes under the reach of the EEE (Exempt, Exempt, Exempt) tax array which means that the interest is exempted from tax at the time of withdrawal. The amount withdrawn after maturity is also tax-free. However, the tax exemption of 80C is limited to a cumulative contribution of Rs 1.5 lakhs. Also withdrawals are tax exempt.
National Pension System (NPS)
An investor must open an NPS account which is a completely voluntary contribution fund on behalf of their own. The minimum investment for NPS is fixed at Rs 500 in Tier I and Rs 1000 in Tier II accounts. There is no fixed overall contribution cap for NPS accounts. In the case of NPS, when a subscriber hits the age of 60, he/she can withdraw a lump sum of up to 60% from their account. That being said, one of the main disadvantages of NPS is that it is mandatory for the remaining of the balance of 40% to contribute towards the annuity plan after the withdrawal. Whereas one more demerit is that after the 10th year of active subscription one can make partial withdrawal up to 25%. Under section 80C, NPS subscribers can reap maximum tax exemption up to the cap of Rs 1.5 lakh. In addition, subscribers are given a tax exemption of up to Rs 50,000 under Section 80CCD (1B). Employees can also demand a deduction under section 80CCD (2) from the employer’s contribution to the employee’s NPS account of up to 10% of the basic salary plus DA.
Conclusion
If saving for retirement, remember considerations such as liquidity, returns, tax benefits, loan benefits, and consistency in choosing the right investment vehicle. Even though NPS is a market-linked tool, there are possibilities of a higher actual rate of return relative to the PPF. That being said, if you don’t want to engage in an annuity scheme, you must not consider NPS. PPF, on the other side, is primarily for risk-averse investors who are happy with low returns, although NPS often matches investors who are able to take a bit more risk with relatively high returns. The PPF requires you to take a loan against it; the NPS does not. Consequently, in the case of PPF, you have greater liquidity. That being said, the tricky part is that you must stop investing purely in NPS or PPF to construct your retirement portfolio. You should invest in one or both other financial options such as equity and debt mutual funds, fixed deposits to diversify your investment portfolio. But make sure you have full clarification about each investment tool and know the potential risks and benefits before making a bet.
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