NPS vs PPF: The National Pension System is a government-sponsored and market-linked pension scheme. Public Provident Fund is a government-funded scheme that offers guaranteed returns on your investments through compound interest.
NPS vs PPF: Both the National Pension System (NPS) and the Public Provident Fund (PPF) are retirement savings schemes supported by the Government of India. Both encourage you to save money regularly to secure life after retirement. Whenever we think of saving for a post-retirement fund, Public Provident Fund (PPF) comes to mind. PPF offers secure returns in the long term and for all ages, which is why it is a great investment opportunity for long-term savings. However, in recent times the National Pension Scheme or NPS has also been gaining a lot of attention as a tool for retirement savings. The usage of NPS has increased after Budget 2015-16, where the government has made provision for an additional tax deduction of Rs 50,000 on NPS investments. Now the question is that if which of these two should be chosen then it is important to understand them.
NPS vs PPF: Understand NPS
National Pension System or National Pension System is a government sponsored and market linked pension scheme that enables people to earn high returns from their investments over the long term within a government regulated system. By investing in this scheme, one can build a retirement fund and receive a regular pension after retirement while saving on income tax. Be it organized or unorganized sector, the objective of NPS is not only to provide financial security in retirement life but also to help one grow their wealth. One can encash the fund only after retirement, while early or partial withdrawal from the fund is allowed only under special circumstances after 10 years.
You also get the benefits of tax exemption when you invest in NPS. Payment for NPS entitles you to a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. An additional tax exemption of Rs 50,000 is also available under section 80CCD(1B).
NPS vs PPF: Who can invest in NPS?
The National Pension Scheme is available to any citizen of India who falls in the age group of 18-70 years. Benefits can be availed by joining the scheme and making regular investments in it. To invest in this scheme, your age should be within 18-70 years. The account holder must submit relevant documents for Know Your Customer (KYC) requirements.
NPS vs PPF: Understand PPF
PPF i.e. Public Provident Fund is a government funded scheme that provides guaranteed returns on your investments through compound interest. With a lock-in period of 15 years, this savings plan can help you build your retirement fund over a long investment horizon. At present 7.1% interest is being given on PPF. It is compounded annually and is considered an ideal option for those looking for a risk-free investment.
Any individual can join this scheme and invest in a PPF account to ensure a secure financial backup as well as enjoy tax benefits in the process. Up to Rs 1.50 lakh can be deposited annually in the PPF account. The investor can avail tax exemption under Section 80C of the Income Tax Act, 1961. There should be a minimum annual deposit of Rs 500 and a maximum of Rs 1.5 lakh in the PPF account and up to 12 deposits are allowed annually. You can opt out of this scheme if you have to pay higher education fees or a situation like medical emergency arises.
NPS vs PPF: Who can invest in PPF?
Any person who is a citizen of India and above 18 years of age is eligible to open and invest in a PPF account. This scheme is not available to Non-Resident Indians (NRIs) or Hindu Undivided Families (HUFs). Keep in mind, you can have only one PPF account in your name. You can open PPF account anywhere in bank or post office. Yes, joint account is not allowed in this. However, an additional PPF account can be opened on behalf of a person who is of unsound mind or is a minor.
What is the difference between NPS and PPF?
The interest rate in PPF is 7.1 percent, whereas in NPS the average return is 10-14 percent. It is market based. Indian citizens above 18 years of age can open an account in PPF. NRIs cannot avail the benefits of investing in PPF. Whereas any Indian citizen between 18-70 years can invest in NPS. Also, NRIs can also open accounts in this.
Similarly, the maturity period of PPF account is 15 years. However, if you wish, you can extend it for another 5 years after this. Whereas nothing like this is certain in NPS. The age of the customer may vary between 60 to 70 years. Talking about investment limits, the minimum investment in PPF is Rs 500 and the maximum is Rs 1.50 lakh annually, whereas the minimum annual deposit in NPS is Rs 6000, there is no upper limit.
In terms of tax deduction, full exemption is available in PPF under Section 80C as tax deduction up to Rs 1.5 lakh annually. Whereas, NPS has partial exemption under Section 80C as annual payment up to Rs 1.5 lakh is tax free under Section 80C. Additional deduction up to Rs 50,000 is also available under section 80CCD(1B).
You can make partial withdrawal from the amount deposited in PPF from the 7th year under special circumstances. Whereas in NPS partial withdrawal is allowed after 10 years. But to exit before retirement, 80% of the corpus will have to be used to purchase an annuity plan. There is no need to buy an annuity plan at the time of maturity in PPF. Whereas in NPS you have to buy an annuity scheme with at least 40% of the maturity amount.
There is no freedom to invest in PPF. You have to invest money only within the annually fixed limit. Whereas in NPS yes, you can choose the investment portfolio. Additionally, PPF has guaranteed returns as it is a risk-free investment at a government-regulated interest rate. Whereas returns in NPS depend on the market. You can also expect to get excellent returns.
Which is the better investment option?
Based on the similarities and differences between NPS and PPF, both have certain features that may attract those looking to build a solid financial backup as a retirement scheme. According to HDFC Life, however, which of the two would be better for an investor will depend on his personal preferences, needs and convenience. Suppose, if a person is risk averse, then PPF is a better option for him, whereas NPS is a more attractive option for someone who wants higher returns despite higher risks. In terms of life goals, NPS is a better option if you have less liability, while PPF should be relied upon more if you need to save for child’s education or marriage.
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