The National Pension Scheme (NPS) and the Public Provident Fund (PPF) are both government-sponsored retirement savings plans. Both the schemes encourage you to save money on a regular basis to secure your post-retirement life.
But why are there two schemes with similar objectives? What distinguishes them? Which one should you pick? If you are caught up in the NPS vs PPF debate, read on to understand NPS vs PPF and help plan your investments better.
NPS vs PPF Investment
NPS was launched by the Government of India, aiming to provide financial aid to retired individuals. It is a pension savings scheme. Complete returns on NPS depend on the pension fund of the manager and the market.
- Minimum age of investment- 18 years
- Maximum age of investment- 65 years
- Period of investment- till age 60 (extension allowed till 70 years).
- Minimum and maximum investment amounts- Rs. 500/year and Rs. 1.5 lakh/year, respectively.
Whereas PPF is a tool which is not restricted to just pensions. The Government backs it. PPF has fixed returns.
- No age restriction for investment (minors are also eligible with a guardian).
- Period of investment- 15 years (extension of 5 years allowed).
- The minimum investment amount is Rs. 1000/year, with no maximum amount.
What is NPS?
The National Pension Scheme, launched by the Government of India in 2004, is available to all citizens of the country who require life savings after retirement. The NPS is divided into two parts, i.e., Tier 1 and Tier 2.
- Tier 1 intends for all government employees and will contribute 10% of their basic and dearness allowance earned each month to an NPS account. The government also contributes the same amount.
- Individuals can open an account under the Tier 2 scheme and contribute to it; however, their contributions to the NPS account will not be matched by the government.
NPS Tier 1 Account Features
- The minimum contribution when opening this account should be Rs. 500 or multiples of that amount.
- The minimum balance at the end of the fiscal year should be Rs. 6000.
- In addition, a minimum of one contribution should be made each fiscal year.
NPS Tier 2 Account Features
- The minimum contribution when opening this account should be Rs. 1000, and the smallest contribution should be Rs. 250.
- The minimum balance at the end of the fiscal year should be Rs. 2000.
- In addition, a minimum of one contribution should be made each fiscal year.
This is the basic information about NPS that you must know before moving forward in the NPS vs PPF debate.
- NPS is a type of savings scheme launched by the Government of India. Being a market-dependent scheme, it provides financial aid to retired citizens.
- Returns on NPS are dependent on the market and the performance of the pension fund manager.
- PPF, on the other hand, is a government-backed tool, not specific to pensions and comes with fixed returns.
What is PPF Account and Its Key Features?
The Public Provident Fund, a government small savings scheme, provides investment security as well as high-interest rates. A PPF account can be registered/opened with an investment as low as Rs. 500.
The maximum investment limit to your PPF account is Rs. 1 lakh per year for a term of 15 years. This investment will earn 8.70 per cent interest and will be compounded annually. An individual’s PPF account will provide them with the following benefits:
- For a long time, the individual can make small investments.
- The entire amount in a PPF account, including interest earned, is tax-free, and no wealth tax is levied.
- Section 80(C) of the Income Tax Act of 1961 provides for a tax rebate for individuals.
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. The PPF account allows you to deduct contributions made to the account up to Rs 1.50 lakhs per fiscal year.
Also Check: PPF Interest Rate
Difference between NPS and PPF: Comparison on Interest Rates & Returns
In case you are wondering about NPS vs PPF, which is better, let us understand the difference between NPS and PPF:
|Who is eligible to invest?||Any Indian citizen. You can even start a PPF account in the name of your minor children and receive tax benefits.||Indian citizens over the age of 18 can open an NPS account, given they are also below the age of 60.|
|Is this scheme open to NRIs?||No||Yes|
|How long does it take to reach maturity?||A PPF account has a 15-year maturity period. This term can also be extended after 15 years in five-year increments, with or without additional contributions.||The maturity period is not predetermined. You can contribute to an NPS account until the age of 60, with the option to continue investing until the age of 70.|
|What is the maximum amount you can invest?||The minimum amount is Rs. 500 per year, with a maximum of Rs. 1,50,000. A maximum of 12 contributions per year are permitted.||The required minimum contribution is Rs. 6,000. There is no contribution limit as long as it does not exceed 10% of your salary or 10% of your gross total income if you are self-employed.|
|What are the tax advantages?||All PPF contributions are tax-deductible under Section 80C. Furthermore, the accumulated amount and interest are tax-free when withdrawn.||The tax benefit is only available on Rs.1.5 lakh under Section 80CCD(1) of the Income Tax Act, and an additional Rs.50,000 under Section 80CCD(2), for a total of up to Rs.2 lakh.|
|Is it possible to withdraw early or in part?||Partial withdrawals are permitted after the seventh year, subject to certain restrictions. Loans are available during the third and sixth fiscal years after opening the account but are subject to certain conditions.||After continuing the scheme for ten years, account holders can make an early or partial withdrawal under certain conditions. To exit before retirement, however, at least 80% of the accumulated corpus must be used to purchase a life insurance annuity.|
|Can I choose or have a say in how my money is invested?||No||Yes, you have the option of investing in equity funds, government securities funds, fixed income instruments, and other government securities.|
|What are the expected returns?||The government sets the interest rate.||The interest rate is determined by the market. As a result, potential returns are higher.|
|Do I have to purchase an annuity?||No||Unless the total maturity amount for your NPS scheme is less than 2 lakh, you must purchase an annuity worth at least 40% of the corpus at maturity.|
ITA or Income Tax Act, 1961 is the charging statue in India for Income Tax. It provides for recovery, levy, administration, and collection of Income Tax.
Word to Remember
NPS or PPF: Which is Better to Plan Your Retirement Corpus?
Both products have distinct advantages and disadvantages that you should consider before investing.
- While PPF provides one of the highest returns in the fixed income category, equities are known to provide much higher long-term returns.
- Looking at the historical returns, one can see that in terms of absolute return, PPF cannot compete with the NPS returns, which have primarily been in the double digits.
- NPS investments have a significant disadvantage when it comes to maturity because you do not receive the entire amount at once (lump sum) and must purchase an annuity with 40% of the corpus.
- Annuities are notorious for providing low returns. However, the additional tax savings available through NPS can compensate for a higher effective corpus.
- The difference between NPS and PPF is that if you invest 10,000 rupees per month for 30 years, your investment will return a corpus of Rs. 1.41 crore in PPF, given the annual rate of return of 8%.
- The same investment in NPS can yield a corpus of Rs. 2.06 crore, assuming a compounded annual growth rate of 10%. If you are in a higher tax bracket, NPS provides a way for you to build a tax-efficient retirement corpus.
- If your retirement goal necessitates a much higher contribution, you can use PPF for fixed income and NPS for market-linked returns.
- If you have less than 15 years until retirement, PPF may not be appropriate for you, but NPS might be better suited for your requirements, so these are some of the differences between PPF and NPS.
- These differences between PPF and NPS will help you make a better investment choice that enables you to minimize your taxes and grow your money to the best of your ability.
Also Read: NPS Benefits
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 a man named Kashish.
Kashish makes the monthly investment of Rs. 8,000 in PPF account for 30 years (a 7.1% return rate). The maturity amount will be Rs. 98,88,583.
Out of Rs. 98,88,583, Kashish’s net investment will be Rs. 28,80,000. The total PPF earned by Kashish will be Rs. 70,08,583.
Kashish invested Rs. 8,000 monthly in his NPS account (60:40 equity debt exposure). After 30 years, the NPS withdrawal amount will be Rs. 1,09,40,762, while the annuity value will be Rs. 72,93,841.
Now, the Rs. 72,93,841 amount will yield Rs. 36,469/monthly pension (with an annuity return of 6%).
In a nutshell, if you have an appetite to take a risk, NPS will be a better option than PPF.
Who can invest in NPS and PPF?
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.
Indian citizens between the age of 18 and 65 can invest in NPS. NRIs can also invest in NPS.
NPS vs PPF is regarded as among the best ways to build a retirement corpus. Both investment options have their own set of advantages, disadvantages, and features and should thus be chosen based on the circumstances. So, if you want to compare them even better, you should consider using a PPF vs NPS calculator.
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.
PPF is not liable for debts because it has fixed returns set by the government. The NPS will be responsible for debts because it is a market-linked scheme.
NPS investments entail investing in equity funds, which are known to generate higher returns as market conditions change. However, the dangers are greater in this case. PPF investments, on the other hand, have fixed returns that are low but risk-free.
The National Pension System (NPS) is a retirement savings option that accumulates funds for any financial needs after retirement. This means that after the age of 60, an individual can use a portion of their NPS balance, while the remainder must be used to purchase annuities. However, PPF allows for partial withdrawals and has a 15-year lock-in period, making it the best investment choice for your child’s education.