NPS vs PPF: A Comparision Between the Two Popular Government Schemes

The National Pension Scheme (NPS) and Public Provident Fund (PPF) are government securities launched to encourage long-term savings for retirement. Although both offer tax benefits, the schemes are very different from each other in terms of returns, tenure, maturity benefit, and lock-in period. Read to find out the differences between these two popular government schemes.

What is the National Pension Scheme (NPS)?

NPS is a government-launched voluntary retirement scheme. Managed by the Pension Fund Regulatory and Development Authority (PFRDA) and Central Government, NPS offers dual benefits of investment and pension.

• Account opening: There are two kinds of accounts in NPS, namely, tier 1 and tier 2 accounts. Tier 1 account is a pension account with a minimum investment of Rs 500, and withdrawals are subject to certain restrictions. Tier 2 is a voluntary account with a minimum investment of Rs 250 and no withdrawal restriction. To open a tier 2 account, you must have an active tier 1 account.
• Documents required to open an NPS account: To open an NPS account, you require an NPS application form and KYC documents such as PAN Card, Aadhar Card, Passport, and bank account details.
• Returns: When you deposit money in any of the NPS accounts, it is invested in market-linked securities such as equity and debt. Hence the returns of NPS also fluctuate based on market volatility.
• Entry age and tenure: The minimum entry age for NPS is 18 years, and your investment matures only when you turn 60. This means your investment is locked-in until retirement.
• Maturity benefit: Upon retirement, 60% of the investment can be withdrawn in lumpsum, which is entirely tax-free. The rest 40% should be used to buy an annuity plan. This annuity plan will pay a pension monthly for a lifetime. If you want to withdraw prematurely, the maximum amount you can withdraw is 25% of the corpus. In case you want to opt out of the scheme, you can get a maximum of 20% of the corpus, and the rest, 80%, must be used to buy an annuity.
• Tax benefit: Investment in NPS up to Rs 2 lakh per annum qualifies for tax benefits under Section 80C and 80CCD of the Income Tax Act, 1961. The pension you receive from the annuity plan is taxable as per your income tax slab rate when you receive it.

What is the Public Provident Fund (PPF)?

PPF is a small savings scheme launched in 1968 to encourage long-term savings. The following are the features of the scheme.

• Minimum and maximum investment: The minimum investment is Rs 500, and the maximum is Rs 1.5 lakhs per annum. To keep the account active, you must invest at least once a year.
• Documents required to open a PPF account: You will need to submit a duly filled and signed PPF application form, passport-size photographs, identity proof such as PAN Card, Driving License, Passport, Aadhar Card, Voter ID, address proof such as Passport, Aadhar Card, Driving License, utility bills, and nominee declaration form.
• Account opening: To open a PPF account, you can go to an authorized bank or a post office. You can only open an individual account.
• Interest: PPF pays a fixed interest of 7.1% per annum. The interest will directly get credited to your PPF account.
• Tenure: The tenure of the scheme is fifteen years. This means your investment will mature only after 15 years, and you will receive your investment proceeds after this tenure.
• Withdrawal: You can partially withdraw your PPF investment after 6th year from account opening.
• Loan against PPF: The scheme also gives you a loan against your PPF investment between the 3rd and 6th year. A maximum of 25% of the amount will be given as a loan for a tenure of three years. You can take a second loan before 6th year if you repay the first loan.
• Nomination: You can nominate a person for your PPF investment. They will receive the investment proceeds after your death.
• Tax benefit: The investment, interest, and maturity proceeds are all exempt from tax as PPF falls under EEE (exempt exempt exempt) category.

Similarities between NPS and PPF

Following are the similarities between NPS and PPF.

• Long-term investment: NPS and PPF are long-term investments with an investment horizon of 15 years or more. Both investments have a lock-in period until they mature.
• Retirement fund: The government has introduced both investments with the aim of promoting savings for the purpose of retirement. Since they have a very long-term horizon, they are the best alternatives for investing in retirement.
• Tax benefit: PFF and NPS offer tax benefits to their investors. Both qualify for tax deduction under Section 80C Income Tax Act 1961. Moreover, the returns are also tax-free. In the case of PPF, the entire return is tax-free, and for NPS, close to 60% of the returns are tax-free.

Differences between NPS and PPF

How Are Returns Calculated Under NPS and PPF?

Let’s understand how the returns under NPS and PPF are calculated with the help of an example.

You are 25 years old, and if you invest Rs 1.5 lakhs per annum in PPF and Rs 1.5 lakhs per annum in NPS at 7.1% per annum for PPF and 10% per annum for NPS. At the end of 15 years, your PPF investment would become Rs 40.68 lakhs. The investment is Rs 22.5 lakhs, and the total interest is Rs 18.18 lakhs.

In the case of NPS, you will have to invest until you turn 60. So, there are 35 years until you turn 60. The total investment would be Rs 52.5 lakhs. If your expected return is 10% per annum, you will have Rs 4.74 crore when you turn 60. The minimum investment in the annuity is Rs 1.89 crore, and the remaining Rs 2.84 crore can with withdrawn in lumpsum. This amount is entirely tax-free.

Both investment products use future value to estimate the returns and maturity amount.

Which is a Better Option: PPF or NPS?

Both NPS and PPF are long-term investment options that can help you during your retirement. Both investments have their own set of pros and cons.

If you are looking for more liquidity, then PPF is a better option, as the scheme allows premature withdrawals and has only 15 years until maturity. In contrast, NPS matures only when you turn 60. However, if you are looking for a higher interest rate, then NPS is better as it invests in market-linked securities and can fetch you higher returns than PPF. PPF, on the other hand, pays fixed interest and is risk-free, but the interest is lower than returns from NPS.

Hence, depending on your resources, risk appetite, and investment horizon, you must choose the best option that will suit you. So, you can either choose one between PPF and NPS or invest in both if you have the resources.

Frequently Asked Questions

Can I invest in both NPS and PPF?
Yes, you can invest in both NPS and PPF. However, the maximum amount you tax deduction you can claim in a year under Section 80C is Rs 1.5 lakhs. So, even if you invest more than Rs 1.5 lakhs in these schemes, you will only get a tax benefit of Rs 1.5 lakhs.

Is NPS Tax-free?
The investment in NPS up to Rs 2 lakhs qualifies for tax deduction under Section 80C and 80CCD. Moreover, upon maturity, 60% of the proceeds are entirely tax-free. The rest 40% is taxed when you receive your pension payment from the annuity plan.

Is PPF tax-free?
PPF falls under the EEE category. This means the investment, interest, and maturity proceeds are tax-free in the hands of investors. An investment up to Rs 1.5 lakhs per annum qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. The interest and maturity amount at the end of 15 years is also tax-free.

Can NPS be used to give monthly income?
Under NPS, you can earn a monthly pension after you turn 60. The maturity corpus that you earn at 60 cannot be withdrawn in lumpsum. At least 40% of this corpus must be used to buy an annuity plan. This 40% will be paid out in monthly pensions throughout your life.

How much money can I invest in NPS?
The minimum investment in NPS is Rs 6,000 per annum. You must invest this amount every year until retirement to keep it active. There is no limit on the maximum amount of investment. However, you can claim tax deductions on investments up to Rs 2 lakhs per annum.

How much money can I invest in PPF?
The minimum investment in PPF is Rs 500. You must invest Rs 500 per annum every year for 15 years to keep your account active. The maximum investment amount is Rs 1.5 lakhs per annum. Even if you invest more than the maximum limit, you will receive interest of only Rs 1.5 lakhs.