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.
2. 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:
a. paying for one’s higher education, or
b. for medical expenses (in case of life-threatening diseases and supported by documents from a medical practitioner)
Here are the other things you need to know before you open a PPF account:
a. The current interest rate for PPF is around 8.1%. The interest is compounded annually
b. The interest is credited to the account on the 31st of March every year
c. 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)
d. You can even take a loan against your PPF account after holding it for a minimum of 3 years. If you repay the loan fully before the 6th year, you could be eligible for another loan as well
3. 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.
4. 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.
|Under NPS, you can choose between two types of accounts: Tier I and Tier II. Here are the key differences between the both:|
|The Tier I account is non-withdrawable till the age of 60; except for in specific situations, while the Tier II account is a voluntary savings account.||Subscribers to Tier II accounts can withdraw the money whenever they want.|
5. Who can Invest in NPS?
The NPS is open to any citizen of India, who is between 18 and 60 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.
6. Key Differences between NPS and PPF
|Who can invest?||Any Indian resident. One can also open a PPF account in the name of his or her minor children and can avail tax benefits||NPS account can be opened by Indian citizens above 18 years and less than 60 years of age|
|Are NRIs eligible for this scheme?||No||Yes|
|What is the maturity period?||A PPF account matures in 15 years. One can also extend this term after 15 years by a block of five years with or without making further contribution||The maturity tenure is not fixed. You can contribute to the NPS account till the age of 60 years with an option to extend the investment to the age of 70 years|
|What is the investment limit?||Minimum Rs. 500 annually, with the maximum amount capped at Rs. 1,50,000. A maximum of 12 contributions per year is allowed||Minimum contribution required is Rs. 6,000. There is no limit on contribution as long as it does not exceed 10% of your salary or 10% of your gross total income in case you are self-employed|
|What are the tax benefits?||All deposits made in the PPF are deductible under Section 80C. Furthermore, the accumulated amount and interest is also tax exempt at the time of withdrawal||Tax benefit is available only on Rs. 1.5 lakh under Section 80CCD(1) of the Income Tax Act, and an additional Rs. 50,000 under Section 80CCD(2) – a total of up to Rs. 2 lakh|
|Is premature withdrawal/partial withdrawal allowed?||Partial withdrawals are allowed after the 7th year onwards with some limitation. Loans during the third and sixth financial years of opening the account are available; but subject to conditions||After 10 years, account holders become eligible for early, partial withdrawal under specific circumstances. However, to exit before retirement, one must use at least 80% of the accumulated corpus to buy a life insurance annuity|
|Can I choose how to invest my money?||No||Yes, you can choose between equity funds, government securities fund and fixed income instruments, and other government securities|
|What are the returns like?||Interest rate is decided by the government||Interest rate is linked to the market. Potential returns are therefore higher|
|Do I have to buy an annuity?||No||At maturity, you need to buy an annuity worth at least 40% of the corpus, unless maturity amount is less than 2 lakh|
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.