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Business News/ Money / Personal Finance/  Can NPS, PPF accounts make you crorepati? Find out here

Can NPS, PPF accounts make you crorepati? Find out here

These two schemes are long-term saving-cum-investment products, although distinct from each other.

Investment can be made for achieving a financial goal in the future. (istockphoto)Premium
Investment can be made for achieving a financial goal in the future. (istockphoto)

The longer you invest, the better are your returns. It doesn't take rocket science to understand this notion. Time after time, no matter which investment options you select whether be equities, mutual funds, bonds, traditional deposits, or any other schemes, they perform better when they are kept for a longer run. Investment can be made for achieving a financial goal in the future. Goals can be even meant for retirement planning. There are two schemes in particular, although distinct from each other, but they are long-term saving-cum-investment products. These are Public Provident Fund Account(PPF )​ and ​National Pension System (NPS) schemes. But can these two schemes make an investor crorepati?

Utkarsh Sinha, Managing Director at Bexley Advisors said, " Where you end up (crorepati or lakhapati) is mostly a function of where you start and when you started. In other words, time in market is a lot more important than timing the market."

He explains that both NPS and PPF can get you to a planned goal, however, the question is whether you like the predictability (hence safety) of a PPF, or prefer the return potential (hence volatility and risk) of an NPS.

What is the PPF scheme?

PPF accounts offer a trifecta combination to investors --- safety, guaranteed returns, and tax benefits. PFF is seen as a tool to build a corpus for their retirement. Among many benefits, PPF is popular as it is one of the safest investment mechanisms as they are backed by the government, and offers a guarantee on investments. PPFs can be opened by a single Indian resident or a guardian on a behalf of a minor. They can be opened either in Post Office or any bank in the country. It is part of the government's small saving schemes.

Investors can earn up to a 7.1% rate on their investments per annum. The interests are compounded yearly. However, it needs to be noted that government revises interest rates on small saving schemes on a quarterly basis. So the rate won't be similar throughout the tenure.

A minimum investment of 500 in a financial year is allowed under the PPF account, while the maximum limit can go up to 1.5 lakh in the respective fiscal. The burden of paying the lump sum amount is reduced in PPF as an investor can make a number of installments in a fiscal year in a multiple of 50 and a maximum of up to 1.5 lakh. Interest is credited to the account at the end of each financial year.

The deposits in the PPF account qualify for 1.5 lakh benefit under section 80C of the Income Tax Act. Also, a loan can be taken against the PPF after the expiry of one year of the account.

Notably, if in any financial year, the minimum deposit of 500 is not made then the PPF account will be discontinued. A subscriber is allowed to take 1 withdrawal in a financial year after 5 years of the scheme excluding the year of the account opening. While the amount of withdrawal can be up to 50% of the balance at the credit at the end of the 4th preceding year or at the end of the preceding year, whichever is lower.

The account has a maturity period of 15 years.

What is NPS scheme?

NPS is a voluntary retirement savings scheme introduced for investors to make a defined contribution towards planned savings thereby securing the future in the form of a Pension. NPS is seen as the world’s lowest-cost pension scheme. Not just that, also administrative charges and fund management fees are the lowest. Subscribers can choose their own investment options and pension fund and see their money grow. The scheme is regulated by PFRDA.

The procedure to open an NPS account is easy as all an applicant has to do is to open an account with any one of the POPs being run through all Head Posts Offices across India and get a Permanent Retirement Account Number(PRAN). Subscribers are allowed to choose their investment options and pension fund and see their money grow.

NPS is broader than compared to PPF accounts as the former is not a pension scheme but also brings in the opportunity to enjoy the performance of market-related instruments. Asset classes under NPS are equities, corporate debt, government securities, and alternative investment funds. This makes NPS more diverse, however, it also comes with the risk of markets.

Also, NPS offers a host of tax benefits. Any individual who is a subscriber of NPS can claim tax exemptions under 80 CCD (1) within the overall ceiling of 1.5 lakh under Sec 80 CCE. Furthermore, an additional tax benefit for investments up to 50,000 in NPS ((Tier I account) is available exclusively to subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of the Income Tax Act. 1961.

Can you become crorepati with investments in NPS and PPF accounts?

According to Bexley's MD, NPS offers a broader selection set for individuals to choose from, where the fund’s performance is key to decision-making on where to invest. With PPF though, there is no selection process involved as the returns are fixed.

Further, Sinha said, "For any retail investor, the prudent decision is probably to go for a mix of fixed income and equity, and so a ratio of NPS and PPF - depending on one’s age and goals - is probably the best way to go."

Explaining in technical terms, CA Manish P. Hingar, CEO & Founder at Fintoo highlighted that with a current interest rate offered by PPF i.e., 7.1%, one can become Crorepati by investing the maximum 1.5 lacs p.a. for 25 years. However, the tenure of PPF account is 15 years and on maturity, PPF investor will accumulate 40.6 lacs only. Therefore, to reach to one crore mark, investor will have to extend the PPF account twice in a block of 5 years to accumulate 1.03 crores. Also, one should note that it is unlikely that the PPF interest rate will remain the same for 25 years.

On the other hand, Fintoo CEO added that returns generated on NPS are market linked and depend on your asset allocation i.e., whether you have opted for Active or Auto Choice. There are 4 asset classes where the money is invested i.e., Equity, Corporate Bonds, Government Bonds, and Alternate Assets. The returns generated will be different for different individuals depending upon their proportion of allocation among these asset classes.

The Fintoo CEO further said, an NPS investor can accumulate 1 crore in 20.5 years assuming a 10% CAGR with 1.5 lakhs annual investment. NPS has no restriction on maximum investment like PPF. So, one can accumulate 1 crore in 15 years by investing 2.86 lacs p.a. as well. Comparing with a 25-year investment in PPF where one can accumulate approximately 1.03 crores, NPS investors will be able to accumulate around 1.6 crores.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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Published: 05 Nov 2022, 05:30 PM IST
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