New Pension Scheme (NPS) > PPF ?

There was a huge talk last year about the new Social Security scheme launched by the Government of India. Lets analyze if it is really better than the Public Provident Fund scheme (PPF).

Investment Requirements -

NPS scheme is applicable to any citizen of India (18-55 years) who can invest a minimum of Rs 500 a month or Rs 6,000 annually. There is no maximum limit on amount you can invest. You will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero.

Annual maintenance charges are 350 Rs per year and there are very nominal charges for opening the account/ Transaction charges etc.

Benefits -

The normal retirement age has been fixed at 60 years. You will start receiving your pension from this age. At 60, A phased withdrawal of portion of the total amount is allowed but the lump sum benefit has to be availed only if you turn 70 years. Remember This is basically a pension scheme not a Fixed deposit. If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus.

Tax Benefits -

The withdrawals from the New Pension Scheme (NPS) will no longer be taxed. For this scheme, the government has proposed EEE (exempt-exempt-exempt) method of taxation – exemption at all the three stages of deposit, appreciation and withdrawal. The NPS was less popular than the Public Provident Fund (PPF) due to taxation at withdrawal. Now, the NPS is likely to emerge as the best vehicle for retirement planning.

How Does this work –

Equity E Option -

Index Funds

C Option -

FDs, Debentures, liquid funds and bonds

G Option -

Government Securities

You have to select a mix of above 3 options by %. Default option is to invest split your total amount in the following format (50 per cent in E, 30 per cent in C and 20 per cent in G). You can only invest 50% maximum in Equity. If you select Auto Select option, as your age grows the fund decreases the % allocated to equity and increase that of C and G to offer you better investment protection.

NPS Auto Select option is expected to provide 12-18% returns per year based on the mix of options selected. But the % is not assured by the plan.

For more information about this scheme contact local branches of State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance. Visit http://en.wikipedia.org/wiki/New_Pension_Scheme_%28India%29 for more information.

 Final Word –

NPS looks like a great alternative to the PPF for those who are looking for a pension instrument. Particularly most of the Software jobs in India don’t have any pension option as a result they might find this as an attractive alternative. But PPF has maturity limit of 15 years after which you can withdraw the entire amount. So, PPF is more attractive in case of planning for an event, lets say to you children education or marriage. You keep investing every year and the accumulated amount can be withdrawn after 15 years and used for your needs. Both are attractive in their own ways.

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