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NPS vs PPF

Government of India has introduced exemplary investment schemes for the benefit of Indian Citizens. Often when we think of post-retirement life’s financial requirements, two schemes introduced by the central government top the preference list of most of the investors. These two schemes are the Public Provident Fund Scheme and the National Pension Scheme. Both these schemes offer great investment opportunity to citizens of India looking for long-term savings tool. Both the schemes are designed to offer financial stability to individuals during the post-retirement phase. Both the Schemes, PPF and NPS, offer specific set of benefits and features to its investors. Both the schemes are great investment tools to create a retirement corpus, so it might get difficult to choose the best. So, read on to know more about these schemes in detail.

Differences Between NPS and PPF

Particulars of Key Differentiation Public Provident Fund National Pension Scheme
Who can invest the scheme? The PPF scheme is available to all Indian Citizen. All Indian residents are eligible to open a PPF account. Indian citizens can even open the PPF account in the name of their minor children and can avail tax benefits. The NPS account can be opened by Indian citizens who are above 18 years and less than 60 years of age.
Are NRIs eligible for this scheme? No, the scheme does not allow NRIs to invest money in PPF account. Yes, the scheme allows Non-Resident Indians to invest their money under the NPS account.
What is the maturity period? PPF account has a fixed maturity tenure. A PPF account’s maturity period is 15 years. Investor can also extend this term of their PPF account even after completion of 15 years. This extension is of 5 years and can be done one or more times. During the extension period, the investor can choose to whether or not to make further contributions to the PPF account. The NPS account does not hold any fixed maturity period. The Subscriber of the NPS account can make contributions in the account till they attain the age of 60 years. The NPS offers the opportunity to extend the investments until the subscriber attains the age of 70 years.
What is the minimum and maximum investment limit? Under the PPF account, following are the minimum and maximum investment limit: Minimum Rs. 500 annually, Maximum investment amount is capped at Rs. 1,50,000. A PPF account holder can invest maximum of 12 times in a financial year. Under the NPS scheme, the minimum contribution that the subscriber is required to contribute is Rs. 6,000. There is no such maximum investment limit.
What are the tax benefits? Under the PPF scheme, the investors can enjoy three-fold tax benefit i.e. all deposits made in the PPF are eligible for tax deduction under Section 80C up to Rs. 1.5 Lakhs, tax free returns and the all the accumulated interest does not attract tax. Under the NPS scheme, the subscriber can avail tax benefit only on Rs. 1.5 lakh under Section 80CCD (1) while an additional tax benefit of Rs. 50,000 can be availed under Section 80CCD (2) of the income tax act – thereby the subscriber can avail a total tax benefit of up to Rs. 2 lakhs.
Is premature withdrawal/partial withdrawal allowed? Yes, Partial withdrawals are allowed under the scheme. Partial withdrawals after 4th year is allowed subject to certain limitation. Yes, partial withdrawal from the NPS is allowed but only after completion of 3 years of subscription.
Can I choose how to invest my money? No, the PPF account does not allow the investors to choose how to invest their money in the scheme. Yes, the subscribers of the NPS can choose the manner of their investment portfolio. They can choose the type of investment as per their investment appetite. Subscribers can choose to invest in Equity or Corporate Debt or Government Securities or Alternative Investment Funds under Active Choice or Aggressive, Moderate and Conservative under Auto Choice-
What are the returns like? PPF account offers attractive returns. The returns are based on then interest rate which is determined by the government. The NPS account offer good returns. The return of the NPS scheme is linked to the market performance and therefore, the returns earned are good.
Do I have to buy an annuity? 20% investment in Gilt Fun 30% Corporate Bond 50% Equity Funds 20% investment in Gilt Fun 30% Corporate Bond 50% Equity Funds

What is NPS?

NPS stands for National Pension Scheme. This scheme is a pension product designed to create a retirement corpus for the working individuals. This scheme is introduced by the central government of India keeping in mind the financial needs of senior citizens. The scheme is introduced in order to promote financial sustainability and development of senior citizens during the post-retirement phase.

Under the scheme, a regular investment is accepted from the subscribers and a corpus is created which is invested in various marketable investment tools. Upon reaching the retirement age, the invested corpus is paid back to the subscriber in the form of pension used for buying an annuity plan. All the investment done under this scheme are a type of voluntary contributions that are made by subscribers during their entire employment tenure. The main motives of central government for introducing a pension scheme for the citizens of India are as under:

  • Provide regular and sustainable income post – retirement
  • Offer reasonable returns on the long-term returns
  • Offer financial security to the senior citizens

The subscribers of the National Pension Scheme can choose to invest their money in two types of account namely: Tier 1 account and Tier 2 account. Both the accounts offer different features to the account holder. Following is the key differentiation of both the account types.

  • Tier 1 account: Under this account, all the investments done cannot be withdrawn till completion of 60 years. Subscribers can avail premature withdrawal facility of funds, subject to specific situations.
  • Tier 2 account: Tier 2 account is a voluntary savings account. This account can be opened only if a subscriber is holding an active Tier 1 account. Subscribers can withdraw their investments made under the Tier 2 account at any given point of time. Thus, above is the basic differentiating key pointer between the two accounts under the National Pension Scheme. In the event of retirement, the subscribers can withdraw a certain percentage of corpus as lump sum amount and the rest can be utilized as a pension.

Who Can Invest in NPS?

The national pension scheme is open for every citizen of India. If any investor wishes to invest in the National pension Scheme, he/she needs to fulfill the following eligibility criteria.

  • Every Indian Citizen whether resident or non-resident Indian can invest in National Pension Scheme.
  • The age of the individual must be between 18 years to 60 years of age, as on the date of submission of the form.

The investor who wishes to invest in the National Pension Scheme must comply with all the terms and conditions of the scheme and submit duly filled application along with relevant KYC documents (Know Your Customer).

What is PPF?

PPF stands for Public Provident Fund. This scheme is introduced by the government of India in the year 1968. The main motive behind introduction of the Public Provident Scheme was to mobilize and channelize the small savings of individuals to create an investment corpus which will offer both financial security and returns on the investment. The Public Provident Fund Scheme is one of the most popular investment schemes introduced by the government, especially for investors who are looking for long-term investment horizon.

Investment in PPF scheme is for 15 years and for best results, it is recommended that investors keep their money invested in this scheme till the maturity of the scheme i.e. for 15 years. In the initial days, the PPF scheme did not allow premature withdrawal of funds. But in recent years, investors can withdraw their funds prematurely, provided the PPF account has been active for minimum 5 years from the date of its opening. Similarly, the premature closure of the PPF account is allowed subject to certain conditions. Investors can

prematurely withdraw their money under following circumstances:

a. for paying for higher education, or

b. to meet medical expenses in case of life-threatening diseases. For this, the PPF account holder has to submit supported medical documents to banks or post office. These documents must come from a medical practitioner.

Top 10 Things to Keep in Mind Before Opening a PPF Account

Following is a list of key things that every investor must keep in mind before opening a PPF account:

  1. The duration of the PPF account is 15 Years
  2. Complete withdrawal of the accumulated corpus is possible only after the PPF account completes 15-year tenure
  3. Premature closure and withdrawal of accumulated corpus is possible only in case of medical emergency. Premature closure and premature withdrawal can be done to meet medical expenses accruing out of treatment of critical illness.
  4. There is a minimum 5 year lock-in period on PPF account. Post completion of 5 years lock-in period, investors can avail partial withdrawal or premature closure facility.
  5. Under the PPF account following are the minimum and maximum investment limit: a. Minimum Rs. 500 annually, Maximum investment amount is capped at Rs. 1,50,000. A PPF account holder can invest maximum of 12 times in a financial year.
  6. Currently, the interest rate offered on the PPF account is around 7.9% from July 2019.
  7. The interest on the PPF account is compounded annually.
  8. The interest earned on the accumulated corpus is credited to the account by banks or post office on the 31st of March in each financial year.
  9. To get maximum interest on the investments, an investor should invest a certain amount in the PPF account between the 1st and 5th day of every month as the interest is calculated on the amount held in the PPF account on 5th of every month.
  10. Loan facility can be availed by the PPF account holders. So, if you are holding a PPF account for 3 years, then your account is eligible for loan facility. Kindly note, if you repay the loan your first loan fully before the PPF account completes 6 years, then your account shall be eligible for availing another loan.

Thus, above are the key highlights of the Public Provident Fund account which every investor must keep in mind.

Who Can Invest in PPF?

The Public Provident Fund Scheme is introduced by the government of India for its citizens. So only resident Indians are allowed to invest in the PPF Scheme. Non-Resident Indians and members of the Hindu Undivided Family cannot invest in PPF or avail the benefits of the Scheme. Kindly note, every individual can hold only ONE PPF account in his / her name. If someone wishes to open 2nd account, then it can be only opened in the name of the minor child.

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FAQs on NPS vs PPF

Can I have both PPF and NPS?

Yes, you can invest in both PPF and NPS account. By investing in these instruments, you can avail tax benefit under Section 80C of the Income Tax Act, 1961. Under the PPF account, you can avail deduction on the contributions made to the account up to Rs 1.50 Lakhs per financial year. Similarly, by investing in NPS, you are eligible to get additional tax benefit of Rs. 50,000 under Section 80CCD of the Income Tax Act, 1961.

Which one is better PPF or NPS?

PPF and NPS both, are investment tools that offer attractive returns. The PPF scheme is a conservative scheme that offers good returns across a long-tenure. On the other hand, NPS allows investment in market related instruments. Both investment tools are good. Opting for any one of the two is majorly dependent on the risk appetite of the investor.

Is it wise to invest in NPS?

Yes, NPS is a good pension scheme that allows to create a pool of retirement corpus. The scheme offers the subscribers to accumulated wealth during the years of employment and post-retirement earn pension out of the accumulated funds.

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