PPF Vs Pension Plans:
If you are wondering where to invest and its come down to PPF or Pension plan. You are not alone ! There are many Indians who every year ask themselves the same question – should I go with Public Provident Fund (PPF) or invest in Pension Plans. Maybe this article will help you decide better.
What are Pension Plans:
Thinking about the money as a return when you’ll grow old? Yes, then you should explore pension plans for accumulating money and generating a regular income. The profits from investments in pension plans are paid out as regular or standard income after retirement.
National Pension Scheme (NPS):
The National Pension Scheme (NPS) was initiated by Indian Government and it is affected from 1st January, 2004. NPS was prepared to be accessible to all Indian citizens either on voluntary basis or compulsory for central government employees (with the exception of armed forces) who have joined their service on or after 1 January 2004. Anyone who is the citizen of India having the age between 18 and 60 can participate in this scheme.
The NPS scheme is launched in two parts;
Tier – 1 Account – This type account is obligatory for all Govt. sector employees. Under this scheme, Government employees will have to give a contribution of 10% of Basic Pay, DP and DA each month. Then the Government will also give the same contribution on his/her account.
Key points of this account for contribution:
- Least sum for contribution at the time of account opening -Rs.500/-
- Smallest sum for per contribution – Rs. 500/-
- Minimum balance at the end of financial year – Rs. 6000/-
- Minimum attempt of contributions in a fiscal year – 1.
Tier – 2 Account – In this type of account each individual can open account under this pension scheme. Government won’t do any contribution for this account.
Key points of this Tier 2 account as far as the contribution goes are:
- Minimum sum at the time of account opening -Rs.1000/-
- Smallest sum for per contribution – Rs. 250/-
- Minimum balance at the end of financial year- Rs. 2000/-
- Minimum number of contributions in a financial year – 1.
Understanding Public Provident Fund:
Public Provident Fund or PPF is known to most Indians as a ‘tax-saving’ saving instrument. It is the most profound exemption for tax. For people who have not a structured pension plan, PPF serves as a retirement income/saving plan for them. PPF is considered to be the reliable plan since the funding scheme is supported all by Government of India. Banks and post offices are the prospective places for an investor. An amount minimum of Rs. 500 and maximum of Rs. 100,000 is required to be deposited in a financial year.
A Brief Comparison between PPF & NPS:
||Anyone who is citizen of India, NRIs are not allowed to open PPF account.
||Anyone who is citizen of India, NRIs can also open NPS account.
||It can be opened in the name of a minor child by the parent or authorized custodian.
||You must have completed 18 years of age and not more than 60 years.
|Limits on Contribution in a Year
||Minimum: Rs. 500
Maximum: Rs. 1 lakh
|Minimum: Rs. 6000
Maximum: No Limit (Subject to underwriting)
|Tax Allegation on Contributions
||All the contribution is tax exempted.
||The contribution made in NPS is deductible from the total income.
|Tax Allegation on Maturity Amount
||The entire amount is tax exempted.
||Maturity amount will be liable to deduct according to tax laws. Though, the cumulative deduction is fixed i.e. Rs.1 lakh.
|Rate of Returns
||In PPF, the rate of return is fixed and currently it is 8.6%.
||Returns from NPS may vary between 10 to 12 %. And there is no assured return and the actual return depends over the market situation.
Which is better – a PPF or a Pension Plan?
Most of the pension plans (nationalized or private) offer life coverage schemes as well. They also make available continuing returns where you can gain from the proficiency of companies. The investment value made in pension plans can be directly market-associated and can hence provide higher level of potential returns as compare to investments made in the PPF. Additional, the returning rate of income in case of PPF is not flat and can be easily altered anytime.
Before making any decision for your hard earning money, the plans and policies should be evaluated properly and revised twice with the words. Coming to the real scores, considering the very factual data and putting a high ray of focus on investments, returns, and continuity in coming income at your hand; pension plans are scoring more than ordinary savings such as PPFs. Since it does not assure any guaranteed return also the return amount is not fixed and may get fluctuate at any moment. Especially NPS (National Pension System) is fetching number of investor with all its true profitable outcomes. As an investor, it is always better to make a border line between the real savings and the future plans. The two should not be mixed and properly understood.
This article is part of our series on helping consumers understand the common investment/savings instruments available outside of stock markets. The series consists of :