With rising inflation and declining job stability, preparing for retirement has become a necessity, not a luxury. Two popular options in India are helping people in this direction, the National Pension System (NPS) and the Voluntary Provident Fund (VPF). Both schemes promise financial security after retirement, but there are big differences in the way they work, returns, tax benefits and risks.
What is NPS?
National Pension Scheme (NPS) is a government-run, market-linked investment scheme, 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, 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 salaried people who are already registered with EPF. In this, the employee can contribute up to 100 percent of his basic salary and dearness allowance.
The returns of VPF are stable, which is around 8 percent to 8.5 percent per annum and it is a fully 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-free, but NPS offers an additional deduction of Rs 50,000 under section 80CCD (1B). On the other hand, if you invest in VPF for 5 consecutive years, the interest and maturity amount become tax-free.
VPF is more flexible in terms of withdrawal, you can withdraw money after 5 years if required. On the other hand, in NPS, the investment remains locked till the age of 60 and it is mandatory to take at least 40 percent of the amount annually (monthly pension) on maturity.
Who is better for?
NPS: If you are running your own business or want high returns over the long term while working, NPS is a better option. It provides tax planning as well as retirement security.
VPF: If you want to avoid risk and prefer a stable, government-guaranteed return, VPF would be right for you.
Some people can also avail both the stability scheme from VPF and the growth scheme from NPS.
In simple words, if you are young and want to invest for a long term, NPS may be better for you. But if you do not want to take much risk and prefer safety, then you can opt for VPF.
