NPS, PPF or VPF? Where should you invest your money?

Investing excess money wisely is crucial for your long-term financial health. It not only shields the money from inflation, but the right investment vehicle also multiplies it over time. If you are looking for fixed-income products some popular modes of investment today are Public Provident Fund (PPF), Voluntary Provident Fund (EPF) and National Pension System (NPS). However, the question arises–where should one invest their excess money?

Here is a lowdown on how to select what suits you the best: 

Public Provident Fund: PPF is a government-backed long-term investment vehicle that provides guaranteed returns and is not influenced by market fluctuations. PPF is a suitable tool for low-risk investors seeking long-term wealth creation. It is one of the most efficient tax-saving instruments. It not only offers you 80C deduction under the old tax regime, the interest income and maturity amounts are also exempt from tax. Currently, it offers 7.1 per cent but the post tax return works out more than 10 per cent for the highest tax slab.

One of the advantages of PPF is your account remains open beyond the initial 15 years, and it can be extended until you request its closure. Once the 15-year mark is reached, the maturity value is preserved without any further extension, but additional deposits into the account are not allowed. If you wish to extend it for an additional 5 years, you must submit a renewal request within one year of maturity. You have the flexibility to apply for as many extensions as you desire. Furthermore, your PPF account can serve as a reliable source of regular income after retirement, as you can withdraw funds annually once you've completed 15 years. 

Consider this: By investing Rs 1.5 lakh every year you can save Rs 40.68 lakh over 15 years, assuming the current interest rate of 7.1 per cent. 

There are, however, a few key points to keep in mind. You can save only up to Rs 1.5 lakh in PPF. For a higher amount of savings, you need to consider other fixed-income avenues. While you can open an account with just Rs 5, you must deposit a minimum of Rs 500 in each financial year to keep the account active. The account also offers liquidity options, permitting withdrawals every year starting from the 7th financial year after the account's opening. Additionally, you can avail of a loan facility starting from the 3rd financial year. So, there's no need to delay in opening your PPF account. 

Voluntary Provident Fund (VPF): Given the annual limit on contributions to your PPF account and the ever-present threat of inflation eroding your wealth-building efforts, it becomes imperative to explore alternative avenues to boost your savings. One such avenue is the Voluntary Provident Fund (VPF), which is available to the salaried class.

But what exactly is VPF? Each month, your employer deducts a mandatory 12 percent from your basic salary, including dearness allowance, and allocates it to the Employees' Provident Fund (EPF). Interestingly, you have the option to contribute significantly more than this obligatory 12 per cent deduction.

Investments in a VPF account offer a significant advantage since they are funded from your pre-tax income. To maximize your savings, you can choose to increase your VPF contribution beyond the mandatory 12 percent deduction from your basic salary. Currently, it offers 8.15 per cent interest rate, which is revised annually. 

However, remember that apart from government employees, the tax exemption threshold for a single year is set at Rs2.5 lakh. If your EPF contributions surpass this Rs 2.5 lakh limit, the interest earned on the excess EPF contributions becomes taxable starting from the fiscal year 2021-22.

If you decide to boost your VPF contributions, you have the flexibility to do so at any point during your employment. However, it's worth noting that many employers typically provide this option at the beginning of the financial year. Your contribution to the Employees' Provident Fund (EPF) is also eligible for a deduction under Section 80C of the Income Tax Act, with a maximum limit of Rs 1.5 lakh.  

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National Pension System: NPS can be another attractive investment avenue when it comes to saving money for your retirement. It is a government-backed voluntary retirement scheme available to all Indian citizens aged between 18 and 60 years. It provides a mixture of debt and equity investment options that could offer higher returns than traditional retirement plans. However, to invest in NPS, investors must be aware of their risk tolerance level and financial goals as equity investments are subject to market risks. The principal is not guaranteed, and the returns can be unpredictable.

The Equity (E) fund of NPS has given 14-17 per cent over the last year, while Government Bond (G) and Corporate Bond (C) schemes have given a return of 8-9 per cent over the same duration

For those who may not be familiar, the National Pension System (NPS) offers two distinct types of accounts: Tier I and Tier II. The Tier I account is compulsory and primarily serves as a pension account, featuring certain limitations on withdrawals. In contrast, the Tier II account is entirely optional and designed as a savings account, affording greater flexibility for withdrawals.

Upon reaching the age of 60, NPS subscribers are required to allocate a minimum of 40 per cent of their NPS corpus to purchase an annuity from a life insurance company. Simultaneously, they have the option to withdraw up to 60 per cent of their NPS corpus as a lump sum, which is completely exempt from taxation.

If a subscriber opts not to withdraw the entire NPS corpus at the age of 60, they possess the flexibility to postpone the lump sum withdrawal until they reach the age of 70. In the event of an early exit before the age of 60, the subscriber can only withdraw a maximum of 20 per cent of their NPS corpus as a lump sum. The remaining 80 per cent of the corpus must be used to procure an annuity, which guarantees a steady post-retirement income.

Your choice of investment should be based on your individual financial goals, risk tolerance, and investment horizon. If you are a risk-averse investor and are looking for guaranteed returns, then PPF or VPF could be the suitable option. Meanwhile, if you are a long-term investor who isn’t wary of taking risks for better returns, the NPS could be a fine option.