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ToggleThe 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.
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.
PPF is a small savings scheme launched in 1968 to encourage long-term savings. The following are the features of the scheme.
Following are the similarities between NPS and PPF.
Basis of Difference | NPS | PPF |
Minimum investment | Rs 6,000 per annum | Rs 500 per annum |
Maximum investment | No maximum limit | Rs 1.5 lakhs per annum |
Returns | Market linked returns | 7.1% per annum |
Tenure | Until retirement | 15 years |
Investor’s participation in the portfolio | Investors can choose their fund manager and decide where to invest their money. | Investors have no say in where to invest the money |
Account extension | You can defer the maturity of NPS until you turn 75 years. | You can extend a PPF account in a block of 5 years an infinite number of times. |
Premature withdrawal | Partial withdrawal is allowed after the completion of 10 years | Partial withdrawal is allowed after 6th year |
Maturity proceeds | Investors are required to buy an annuity with at least 40% of the proceeds, the rest 60% can be used freely. | All the maturity proceeds can be used freely. There is no restriction on withdrawal at maturity. |
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.
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.
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.