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.
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:
| Particulars | NPS (National Pension Scheme) | PPF (Public Provident Fund) |
| Min. Investment Amount | Tier-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 Amount | No limit | Rs 1.5 lakhs |
| Joining Age | 18 years or more | No age limit |
| Deposit Frequency | Monthly | Non-specific |
| Returns | Depends on market-conditions (may range from 5% to15%) | Fixed (current 7.1%) |
| Maturity | Until the account-holder attains 60 years of age | 15 years from the date of first deposit |
| Partial Withdrawal before Maturity | Only 3 times (with 5-gap between two withdrawals) | Every year from 7th year |
| Premature Closure | Allowed 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 Facility | No 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
Yes, you can invest in PPF and NPS both.
The answer depends on an individual’s risk-bearing capacity. PPF investments are less risky compared to NSP investments.
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).
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.
Withdrawal of 40% (tax exempted) can be made on maturity. Above that, the tax will be deducted.
NPS investments entail investing in equity funds, which are known to generate higher returns as market conditions change.
