NPS vs PPF: Which is a Better Option For Investing?

National Pension Scheme (NPS) and Public Provident Fund (PPF) are both government-backed retirement saving schemes. They both encourage you to regularly save funds to secure your post-retirement life. However, why are there two schemes with similar goals? How are they different? Which of them should you choose?

If you are caught in the NPS vs PPF debate, we can help! In this article, you will find information on both NPS and PPF to help you plan your investments better.

NPS vs PPF?

This is indeed a tough question. Whenever we think of saving for a post-retirement fund, the Public Provident Fund (PPF) comes to mind first and foremost. PPF provides secured returns over the long term and for all ages, which is why it is a great investment opportunity for long-term savings.

Of late though, the National Pension Scheme or NPS has also been gaining a lot of attention as a tool for making retirement savings. The use of NPS has increased after the Budget 2015-16, where the government provided for an additional tax deduction of Rs.50,000 in NPS investments.

However, if you could only choose one of these which should it be? This is the question that we aim to answer in this article.

Understanding PPF

PPF is an age-old government-funded investment scheme that has been popular among investors with a long investment horizon. For best results, one needs to stay invested in the scheme for 15 years!

Earlier, there was no provision for premature closing of the PPF account but this feature has been added now; with the caveat that the account holder keeps the PPF account active for a minimum of 5 years before closing it.

The premature closing will only be allowed under certain circumstances like:

• Paying for one’s higher education, or
• For medical expenses (in case of life-threatening diseases and supported by documents from a medical practitioner)
• on change in residency status of the account holder on production of copy of Passport and visa or Income-tax return

In case of premacure, the rate of interest which will be applied to the account will be reduced by one percent than the rate on which interest has been credited in the account from the very start of the account, or the date of any renewal, whichever is earlier.

Here are the other things you need to know before you open a PPF account:

• The current interest rate for PPF is around 7.1% p.a. The interest is compounded annually
• The interest is credited to the account on the 31st of March every year
• To get maximum interest, the deposits should be made between the 1st and 5th of every morning as the interest is calculated on the lowest amount held (i.e. the amount held on the 5th)
• You can even take a loan against your PPF account after . If you repay the loan fully, you could be eligible for another loan as well.

Who can invest in PPF?

Any Indian citizen can invest in PPF. One citizen can have only one PPF account unless the second account is in the name of a minor. NRIs and HUFs are not eligible to open a PPF account.Joint account cannot be opened under this scheme.

Loan against a PPF Account

• A PPF account holder can avail the loan benefit after one year from the end of the year in which the initial deposit was made, but before the expiration of five years from the end of that same year.
• Only 25% of the balance in the account can be availed as loan.
• An account holder will not be eligible for a new loan until the previous loan, along with the interest, has been fully repaid.
• An account holder shall be entitled to only one loan in a year.
• The interest is at the rate of one percent per annum on the principal amount.
• In case of an account opened on behalf of a minor or a person of unsound mind, the guardian may apply for the loan for the benefit of the minor or the person of unsound mind by submitting the following certificate to the accounts office, namely:- “Certified that the amount sought to be withdrawn is required for the use and welfare of Shri/Smt./Master/ Kumari……………………………. who is a minor/ a person of unsound mind/ a person incapable of operating his account due to physical infirmity and is alive on this……the day of…………..(month), ……….(year).”.

Discontinuation of account

• Any account holder who deposits Rs.500 in the initial year and fails to pay the minimum amount as prescribed by the scheme in any subsequent year will have the account treated as discontinued.
• Such an account may be revived with a fee of Rs. 50, along with the minimum prescribed amount for each year of default. 
• Such account holders will not be eligible to open a new account before the closure of such a discontinued account after maturity.

Limits of Subscription

• A deposit of at least five hundred rupees and not more than one lakh fifty thousand rupees, in multiples of fifty rupees, may be made in the account during a year.
• The maximum limit of one lakh fifty thousand rupees per individual includes deposits made both in their own account and in the account opened on behalf of a minor.

Closure of account or continuation of account without deposits after maturity

• Any time after the expiry of fifteen years from the end of the year in which the account was opened, the account holder may apply in Form-3 to the accounts office for the closure of his account. The accounts office shall allow the withdrawal of the entire balance along with due interest up to the last day of the month preceding the month in which the account is closed
• The account holder may apply for the closure of his account any time after the expiry of fifteen years from the end of the year in which the account was opened.

Understanding NPS

Now that we understand the basics of PPF, let us take a look at the NPS (National Pension Scheme) as well. The National Pension Scheme is a government-sponsored pension program which is open to employees from the public, private and unorganized sectors (except for the armed forces).

In this scheme, the account holders can invest regularly in a pension account through the tenure of their employment. Once they retire, the account holders can use a certain percentage of the corpus as a lump sum and use the rest as a pension.

Who can invest in NPS?

The NPS is open to any citizen of India, who is between 18 and 70 years old on the date of submission of their application. The account holder would need to comply with the Know Your Customer (KYC) norms and should not be an undischarged insolvent or of an unsound mind.  

The National Pension System allows individuals to make investments in any of the following two accounts.

After opening an NPS account, a unique Permanent Retirement Account Number (PRAN) is assigned to each subscriber. All fund management activities, including contributions to the scheme, are carried out through this PRAN.

• Tier-1 Account: Individuals can open this account with a minimum deposit of Rs.500. There are certain restrictions of withdrawal in this account. Tax exemption will be available up to Rs.2 lakhs per annum.
• Tier-2 Account: Individuals can open this account with a minimum deposit of Rs.250. Individuals can invest in Tier-2 account only when they have an active investment in Tier-1 account. Tax exemption will be available up to Rs.1.5 lakhs per annum only for government employees.

Key differences between NPS and PPF

NPS vs PPF: Comparison

Risk & Safety: NPS is market linked and a bit risky, but it is strictly regulated by the PFRDA so there is almost no chance of malpractices. PPF is entirely government backed so there is almost risk free returns.

Returns: NPS can give up to 9-12% in some cases whereas PPF provides low but stable returns around 7-8%.

Liquidity: NPS has slightly higher liquidity as it provides multiple opportunities of partial withdrawal. PPF however, allows partial withdrawal after a certain lock-in period and an amount cap.

Taxation: NPS balance withdrawn on maturity is tax free whereas annuity have to be purchased after paying taxes. PPF is under the EEE or exempt-exempt-exempt category.

As you can see, NPS makes for a great retirement savings scheme. It may not be the best scheme to invest in if your aim is to save for other purposes like children’s education, daughter’s marriage etc. For all of these needs, a PPF scores over NPS as the best investment scheme.