NPS vs PPF- Which is a Better Investment option
Both Public Provident Fund (PPF) and National Pension Scheme (NPS) are Central Government sponsored investment schemes. The investors who want to save their funds for social & financial security for post-retirement life can opt for any of these options. But the investors are always confused between these two investment alternatives. This article tries to throw light on both investment schemes with a focus on bringing differences between the two before the readers.
PPF vs. NPS?
This is seriously a tough question to answer. Public Provident Fund (PPF) has been one of the most reliable and popular investment schemes over the years. PPF is counted amongst the safest and secured investment options in India. Whereas, National Pension Scheme (NPS) is a new age investment scheme pronounced by the Central Government. NPS has gained popularity and attention of the investors due to additional tax deduction of Rs. 50,000 available on account of NPS investment. However, returns on NPS may be subject to market risk. So, choosing between PPF and NPS depends on the risk appetite of the investor.
What is Public Provident Fund (PPF)?
This scheme was launched by the Government in 1965. The main objective of the scheme was to provide post-retirement provident fund benefits to those who are not working as an employee or worker and thus are not covered by EPF. This scheme comes with a lock-in period of 15 years and guaranteed interest at the rates announced by the Government. Further, the investor can get a tax deduction of an amount up to Rs. 1,50,000 by investing in PPF as per section 80C of the Income Tax Act.
Important points to know about PPF
- The current rate of interest on the PPF Account is 7.1% p.a. compounded annually. This rate is highly lucrative as compared to the interest rate on deposits with banks.
- The interest accumulated on the PPF balances is credited to the account on 31st March of every year.
- Interest earned on the PPF account is exempt from tax.
- You can also avail of a loan against your PPF balances after a minimum holding period of 3 years.
- The tenure of the PPF account is for 15 years which may be extended by 5 more years.
- The minimum investment amount is Rs. 500 and the maximum investment amount is Rs. 1,50,000. In case, investment above Rs. 1,50,000 is made in any year, such excess amount will not earn interest and will not be eligible for tax deductions.
- Deposit in the PPF account is required to be made at least once a year for 15 years.
Who can open a PPF account?
- Any Indian Citizen can open a PPF account and only one account can be held in the name of any individual.
- NRIs are not entitled to open a PPF account.
Can a loan be taken against the PPF account?
Yes, you can take a loan against the balances in PPF account after the completion of three years of tenure of the PPF account. The maximum term of the loan shall be 3 years. The loan amount shall not be more than 25% of the total balances in the PPF account. You are also eligible to get another loan only after repayment of the first loan.
What is National Pension Scheme (NPS)?
National Pension Scheme (NPS) is a market-linked voluntary contribution retirement scheme. NPS is a Central Government sponsored pension program targeting employees from the public, private and unorganized sectors. By investing in NPS, you can build a retirement corpus and avail pension amount during your retirement years.
In this scheme, the accountholders can invest regularly through the tenure of their employment. On retirement, the accountholders can commute a part of the available balance in the NPS account and get the balance in the form of pension. Any Indian citizen between the age of 18 and 65 can join NPS. But it should be kept in mind that returns on NPS are not fixed and it’s a market-linked scheme.
Important differences between PPF and NPS
Point of Difference |
PPF |
NPS |
Who can invest |
Any Indian resident can invest in PPF. PPF account can be opened in the name of the minor child also. |
NPS account can be opened by any Indian citizen between the age of 18 years and 60 years. |
Can NRI invest in the scheme |
NRIs are not eligible to invest in PPF. |
NRIs are eligible to invest in NPS. |
What is the minimum investment limit? |
You are required to deposit at least Rs. 500 per year in PPF account. |
The minimum contribution is Rs. 6,000. |
Tax Benefits |
Deposits made in the PPF account are eligible for tax deduction u/s 80C to the extent of Rs. 1,50,000. Interest on PPF as well as maturity amount is 100% tax-free. |
Tax benefit for NPS contribution is available u/s 80CCD (1) of the Income Tax Act for Rs. 1,50,000. Further, an additional deduction of Rs. 50,000 u/s 80CCD (2) is also available. |
Expected returns |
PPF account earns interest at the rates notified by the Government, which is presently at 7.1% p.a. |
Returns on NPS accounts are market-linked and therefore may vary over the period of time. |
What is the maturity period? |
The maturity period of the PPF account is 15 years which may be extended by the investor for another block of 5 years (with or without contribution). |
There is no fixed maturity tenure. You can contribute to the NPS account till the age of 60 years with an option to extend the investment to the age of 70 years. Thus, the amount invested in NPS is available at your disposal after attaining the age of 60 years. |
Control over how your money gets invested |
No control |
You can decide under which fund your money will be invested. |
Premature/ partial withdrawal |
Partial withdrawals are allowed after the 7th year onwards. You may also avail loan after 3 years of opening the PPF account. |
After 10 years, NPS account holders become eligible for early or partial withdrawal under specific circumstances. |
Conclusion:
To sum up, both schemes are good retirement saving options and you can earn a handsome corpus amount post-retirement. Returns under the PPF scheme are fixed whereas returns under NPS vary according to market fluctuations. In long run, NPS will certainly generate higher returns as compared to PPF along with an additional deduction of Rs. 50,000 u/s 80CCD (2) of the Income Tax Act. Therefore, if you are ready to take risks, NPS is certainly a better option.
Disclaimer: The above article should not be construed as investment advice and is meant for informative purposes only. Taxwink is not responsible for the correctness and accuracy of any information contained in this article. Readers are requested to act diligently before making any investment in any scheme.