Is NPS or VPF best for retirement planning?
With rising inflation and decreasing job stability, preparing for retirement has become a necessity, not a luxury. Two popular options in india are helping people in this direction, National Pension System (NPS) and Voluntary Provident Fund (VPF). Both schemes promise financial security after retirement, but there is a big difference in their working methods, returns, tax benefits and risks.
What is NPS?
National Pension System i.e. NPS is a government, market-linked investment scheme, which is open to all indian citizens between the ages of 18 and 70, whether you are salaried or self-employed. In this, you can divide the investment into shares, government bonds, corporate bonds or other options as per your choice.
This scheme gives the investor the freedom to choose the fund manager and asset allocation of his choice. If you are young and investing for a long term, then you can get better returns by investing up to 75 percent in equity through Active Choice. Its average annual return is considered to be 8 percent to 12 percent.
What is VPF?
VPF i.e. Voluntary Provident Fund is an extension of EPF (Employees' Provident Fund). It is available only to those salaried people who are already registered in EPF. In this, the employee can contribute up to 100 percent of his basic salary and dearness allowance. The return of VPF is fixed, which is about 8 percent to 8.5 percent annually and it is a completely government guaranteed scheme. Its money is managed by EPFO (Employees' Provident Fund Organisation), which makes the risk zero.
Tax and withdrawal benefits
Both NPS and VPF are tax exempted, but NPS offers an additional Rs 50,000 exemption under section 80CCD (1B). On the other hand, if you invest in VPF for 5 consecutive years, the interest and maturity amount becomes tax-free. VPF is more flexible in terms of withdrawal, you can withdraw money after 5 years if needed. On the other hand, in NPS, the investment remains locked till the age of 60 and on maturity it is mandatory to take annuity (monthly pension) of at least 40 percent of the amount.