NPS or PPF? Where should you invest in?

When it comes to investment avenues, there are too many to count. If you look out into the market to find avenues for saving your hard-earned money, you would be spoilt for choice. There is a range of market-linked and fixed-income savings avenues that help you save, and also plan your income tax returns. Two such avenues that are quite popular with investors include the National Pension Scheme (NPS) and the Public Provident Fund (PPF). Which among these, do you think, is the best?

To know which avenue is better, you first need to understand these avenues in detail. So, let’s analyse the two – 

Understanding NPS – What is National Pension System?

The National Pension System (NPS) scheme is a retirement-oriented saving scheme. The Government launched the scheme to help investors accumulate a retirement corpus and receive pensions after maturity. The Government-sponsored pension scheme invests your contributions into market-linked avenues, helping you to earn inflation-adjusted returns.

Understanding PPF – What is Public Provident Fund?

The PPF scheme is a fixed-income saving scheme. The scheme runs for 15 years, and the tenure can be extended in blocks of 5 years. You are required to deposit a minimum amount into the PPF account every year, and your investment would earn a fixed rate of return, determined by the Government.

NPS vs PPF – Comparison between the two

Here are some factors which differentiate these schemes –

• Eligibility

Resident individuals and NRIs aged 18 to 60 years can invest in the NPS scheme. The PPF scheme, on the other hand, is open for resident Indians only. There is no age limit for PPF investments, and an account could be opened in the name of a minor too.

• Market exposure

NPS is a market-linked scheme, like mutual funds, where the returns are not guaranteed. Your investments are exposed to the market through different funds (equity, debt, etc.), which are managed by a fund manager. Returns depend on the performance of the underlying assets of the fund. 

The PPF scheme, on the other hand, does not expose your investments to the market. The returns are fixed and do not depend on market performance. The current rate of interest under the PPF scheme, till 31st March 2021, is 7.1% per annum. 

• Tenure

The NPS scheme runs till you reach 60 years of age. You can defer the vesting age to 70 years too if you want. The PPF scheme, on the other hand, runs for 15 years, which can be further extended in blocks of 5 years, for as long as you want.

• Investment amount

The minimum amount to open a Tier I NPS Account is INR 500. Thereafter, the minimum amount of a contribution is INR 500, and a minimum deposit of INR 1000 is needed in a year. For a Tier II account, you need a minimum amount of INR1000. Thereafter, INR250 should be deposited every year. There’s no limit to the maximum deposit that you can make.

You can open a PPF Account with INR 100 only. However, a minimum deposit of INR 500 is required in a year, and the maximum deposit limit is INR 1.5 lakh per annum.

• Benefit on maturity

On maturity, you can withdraw up to 60% of the corpus in a lump sum. The remaining corpus, however, would be used to pay you pension. You can choose from different annuity options under the scheme. 

However, in the case of PPF, you can withdraw the entire amount in a lump sum when the scheme matures.

• Premature withdrawals and exit facility

NPS has a lock-in period of three years and allows premature withdrawals after that. You can withdraw up to 25% of the corpus for specific needs, like funding higher education, buying a house, etc. If you exit from the scheme before maturity, you would be allowed to withdraw only 20% of the corpus in a lump sum. The remaining 80% would be used to pay annuities.

In the case of PPF, there is a lock-in period of 6 years. Partial withdrawals are allowed from the seventh year of investment. However, you can avail of loans between the 3rd and 6th year. You can avail of a loan of up to 25% of the PPF account balance at the end of the 2nd year, or at the end of the previous year. You can exit from the scheme and close your account only in specific instances like medical treatments or higher education.

• Income tax benefits

The NPS account allows you to save tax in multiple ways. The amount invested is allowed as a deduction under Section 80CCD (1). The limit is INR 1.5 lakhs, including the deductions under Section 80C. You can claim an additional deduction of up to INR 50,000 under Section 80CCD, (1B) by investing in the NPS scheme. Moreover, if your employer also contributes to the NPS scheme on your behalf, an additional deduction is available under Section 80CCD (2). Partial withdrawals are tax-free, and so is the lump sum amount that you withdraw on maturity. The annuity payments, however, would be taxable in your hands.

PPF is an Exempt -Exempt-Exempt scheme. This means that it allows tax benefits on investment, interest earned as well as on maturity proceeds. The investment qualifies as a deduction under Section 80C up to INR 1.5 lakhs. The interest that you earn and the amount that you receive on maturity also attract income tax exemption and are completely tax-free in your hands.

NPS Vs PPF: Which is a Better Option to Build a Retirement Corpus?

Both the schemes have their comparative advantages over each other. Have a look –

6 reasons for investing in NPS

1. Market-linked returns from investments management by expert Pension Fund Managers.
2. Additional tax benefits under Section 80CCD (1B).
3. Lifelong income in the form of annuities.
4. Short lock-in period and premature withdrawal facility.
5. Choice of investment funds and investment strategy.
6. Earmarked retirement corpus.

6 reasons for investing in PPF

1. Fixed returns for risk-averse investors.
2. Tax benefit on investment, returns, and maturity benefit.
3. A long-run debt option with disciplined investing.
4. Small investment amount needed.
5. Ease of account opening through banks and post-offices.
6. Availability of loans against the deposit.
   

NPS vs PPF – Where should you invest in?

You should carefully assess your investment needs, goals, time horizon, and risk appetite, and then make a choice. If you want to have a dedicated retirement fund accumulation and don’t mind market risks, NPS would be a suitable investment avenue. However, for fixed returns and for saving for other goals, you can pick PPF. You can also invest in both NPS and PPF for a diversified portfolio and for meeting the different investment needs.

So, understand what these avenues are all about, their features, and their differences. Then make a choice depending on your needs and strategy. 

Related Links

• NPS vs Mutual Fund
• What is the Difference Between Saving and Investing?
• How to open a PPF Account?
• All you need to know about SBI PPF Account