National Pension Scheme (NPS) and Public Provident Fund (PPF) are both government-backed retirement saving schemes. PPF offers stable returns (currently 7.1%) whereas NPS offers market based return, depending on the type of scheme chosen.

NPS vs PPF?

There are a bunch of differences between NPS and PPF. The perfect choice of investment between these two options depends on a variety of factors like the desired investment duration, risk appetite, tax deductions, etc. The following table shows a snapshot of differences between NPS and PPF.

Understanding PPF

• PPF is an age-old government-funded investment scheme that has been popular among investors with a long investment horizon.
• One can invest in PPF for a duration of 15 years.
• 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)
• Minimum 5 years of active account is eligible for premature withdrawal. 
• Circumstances at which premature withdrawal can be made:
  • Paying for one’s higher education, or
  • For medical expenses (in case of life-threatening diseases and supported by documentation)
  • On change in residency status of the account holder (supported by documentation)
• You can even take a loan against your PPF account after.

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.

Understanding NPS

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

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.  

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.