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Investment Simplified > Pension & Retirement > NPS Vs PPF: Differences & Similarities
Pension & Retirement

NPS Vs PPF: Differences & Similarities

Monika Mohan
Monika Mohan June 23, 2022 8 Min Read
Updated 2022/12/15 at 6:39 PM
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NPS vs PPF: National Pension Scheme (NPS) and the Public Provident Fund (PPF) are two of the most popular government-sponsored retirement savings schemes. Both the schemes encourage you to save money on a regular basis to secure your post-retirement life.

Contents
NPS vs. PPF: DifferencesNPS vs. PPF: FeaturesNPS vs PPF: Comparison on ReturnsNPS vs. PPF: Comparison on Premature WithdrawalNPS vs. PPF: Comparison of Tax BenefitsPPF vs NPS: CalculationNPS vs. PPF: Eligibility Criteria

But do we have two pension schemes with similar objectives? What is the difference between NPS and PPF? Should you invest in NPS or PPF? Let’s find out.

NPS vs. PPF: Differences

The following are the basic differences between NPS and PPF:

ParticularsNPS (National Pension Scheme)PPF (Public Provident Fund)
Min. Investment AmountTier-I Account: Rs 500/month
Tier-II Account: Rs 250/month
Rs 500 (no monthly payment required)
Can make max. 12 contributions in 1 year
Max. Investment AmountNo limitRs 1.5 lakhs
Joining Age18 years or moreNo age limit
Deposit FrequencyMonthlyNon-specific
ReturnsDepends on market-conditions (may range from 5% to15%)Fixed (current 7.1%)
MaturityUntil the account-holder attains 60 years of age15 years from the date of first deposit
Partial Withdrawal before MaturityOnly 3 times (with 5-gap between two withdrawals)Every year from 7th year
Premature ClosureAllowed if/when:
– account-holder dies before 60 years
– 5 years are complete
Allowed if:
– accountholder dies during PPF tenure
– accountholder suffers from terminal disease
-to pay higher education expenses of accountholder
Loan FacilityNo loan facility Available from 3rd to 6th financial year

NPS vs. PPF: Features

Here, we shall draw the basic features of NPS as well PPF (Public Provident Fund):

Features of NPS (National Pension Scheme)

  • Minimum age of NPS investment- 18 years
  • NPS Period of investment- till age 60 (extension allowed till 70 years)
  • Types of NPS Accounts: Tier-I (mandatory) and Tier-II (voluntary)
  • NPS Minimum Investment: Tier-I: Rs 500/ month; Tier-II: Rs 250/month
  • Returns: Not fixed; depend on market-conditions

Features of PPF (Public Provident Fund)

  • No age restriction for investment (minors are also eligible with a guardian)
  • Period of investment- 15 years (extension in blocks of 5 years is allowed)
  • Minimum PPF investment amount is Rs. 500/year (can be Rs 1,000 for banks like HDFC)
  • Maximum PPF investment amount is Rs 1.5 lakhs/year

Also Check: PPF Interest Rate

NPS vs PPF: Comparison on Returns

Here, we will talk about how the interest or the returns are processed in NPS and PPF, both.

Returns on NPS: How NPS Works?

The amount deposited in an NPS account is invested in different market-linked instruments like equity. You can choose from Auto Choice and Active Choice.

In Auto Choice, your invested amount is managed by fund managers appointed by the Govt. of India. This money is invested in various place to gain the best returns.

Must Read: NPS Calculator

In Active Choice, you can direct your deposit amount towards your choice of market-linked instruments. Here, the control remains in your hands. If you believe you have a good understanding of how the market works, you may choose this option.

The returns on your NPS account depend on how well your money performs in these market-linked instruments. Your NPS returns may range between 5-15%.

Returns on PPF: How PPF Works?

PPF is a fixed-rate investment scheme which means that the PPF returns are guaranteed. No matter how high or low the market goes, you will earn interest in your PPF account as per the PPF rate of interest (currently 7.1%).

Must Read: How PPF Interest is Calculated?

NPS vs. PPF: Comparison on Premature Withdrawal

NPS vs. PPF: Comparison of Tax Benefits

Here, we will talk about how investing in National Pension Scheme or Public Provident Fund can help you in saving income taxes.

NPS Tax Benefits

NPS income tax deductions allowed to employees on self-contribution

  • up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE
  • up to to ₹50,000 u/s 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakhs u/s 80 CCE

NPS income tax deductions allowed to employee on Employer’s contribution:

Up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakhs provided under section 80 CCE.

NPS income tax deductions allowed to to self-employed:

  • up to 20 % of gross income under section 80 CCD (1) with in the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE
  • up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE

NPS tax benefits on partial withdrawal from NPS account:

NPS partial withdrawals are eligible for tax exemption on the amount withdrawn up to 25% of the self contribution.

NPS Tax benefit on lump sum withdrawal:

NPS withdrawal is eligible for tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under section 10(12A).

PPF Tax Benefits

  • Section 80C: Deposited amount can be claimed for deductions in a financial year (up to Rs 1.5 lakhs)
  • Section 10: Interest earned is free from income tax

For further details: PPF Tax Exemptions

Did You Know? 

Investing in NPS qualifies you for an additional tax benefit of Rs. 50,000 under Section 80CCD of the Income Tax Act of 1961 (for self-employed persons).

PPF vs NPS: Calculation

PPF and NPS are two of the most considered long-term investment plans. To understand how to calculate PPF and NPS, let’s take an example of Ms X.

Ms X’s Monthly Investment Amount for NPS and PPF: Rs 1,000 per month

NPS Calculation

X is 20 years old and starts investing in NPS at Rs 1,000 per month. She will stay invested for 40 years in NPS.

Let’s see the how much NPS return she would get:

  • Her expectation of return: 10%
  • Total Years of NPS contribution: 40 years
  • NPS maturity amount for Annuity: 40%
  • Annuity Rate Expected: 8%

Ms X’s Total amount invested in NPS: Rs 4,80,000

Total NPS Annuity Value will be: Rs 25,50,712

NPS Lump-sum Value will be: Rs 38,26,069

This amount is not guaranteed. It all depends on how the market performs, therefore risk is involved.

PPF Calculation

Let’s see the how much PPF return Ms X would get:

  • PPF interest rate: 7.1%
  • Total Years of NPS contribution: 15 + 25 years (40 years)

Her Total amount invested: Rs 4,80,000

Total PPF maturity amount: Rs 26,32,773

This will be guaranteed. There will be no risk involved.

In a nutshell, if you have an appetite for market risks, NPS will be a better option than PPF in terms of earning higher returns.

Must Read: NPS Calculator

NPS vs. PPF: Eligibility Criteria

The following is the difference between NPS and PPF in terms of who can join the schemes:

NPS Eligibility Criteria

Only Indian citizens can invest in PPF. A person can only have a single PPF account unless the other account is in the name of a minor. Minors can invest in PPF with a guardian.

PPF Eligibility Criteria

Indian citizens between the age of 18 and 65 can invest in NPS. NRIs can also invest in NPS.

NPS vs. PPF: FAQs

1. Can You Invest in Both PPF and NPS?

Yes, you can invest in PPF and NPS both.

2. Is NPS Better than PPF?

The answer depends on an individual’s risk-bearing capacity. PPF investments are less risky compared to NSP investments.

3. What are the disadvantages of NPS?

Returns are not a hundred percent guaranteed; tax deductions at the time of withdrawal and investment restrictions (candidate cannot invest more than 50% of his/her total investment in NPS account).

4. How much should I invest in PPF and NPS?

In PPF, Rs. 500 is the minimum investment amount. Whereas, in NPS, Rs. 1000 is the minimum investment amount. You can make a decision on which plan suits you better in the long run.

5. Is NPS taxable on maturity?

Withdrawal of 40% (tax exempted) can be made on maturity. Above that, the tax will be deducted.

7. Which investment option, NPS or PPF, produces higher returns?

NPS investments entail investing in equity funds, which are known to generate higher returns as market conditions change.

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Posted by Monika Mohan
Monika Mohan is a writing enthusiast who has luckily turned her passion into profession. For the greens, she has an established foot in the personal finance sector and likes to put forth complex topics in an easy-to-understand manner, minus the jargons. Outside the penny lane, it’s all about poetry, mountains and single-malts.
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