NPS vs. PPF: Which Is the Better Investment Option?

When it comes to securing your financial future, two popular choices often come up: NPS vs PPF. Both the National Pension System (NPS) and the Public Provident Fund (PPF) are trusted options in India for building a strong, safe, and tax-efficient corpus over the long term. But when you’re actually trying to decide between the two, things can get a little confusing.

On this page, we are going to compare the Public Provident Fund (PPF) and the National Pension System (NPS) to help you decide which might be the better option for you.

What is NPS (National Pension System)?

The National Pension System is a voluntary long-term retirement investment scheme. It was initially designed for government servants but has since been made available to all Indian citizens.

It is among the most preferred investment plans in India for building a tax-free retirement plan and corpus. In NPS, your investments are divided between equities, government securities, corporate debt, and alternative assets, depending on your preferred fund manager and risk tolerance.

Who Can Invest in NPS?

If you’re an Indian between 18-70 years, then you can open an NPS account without any issues. However, you must clear your KYC requirements. However, it is especially suitable for:

• Salaried people who want to build a retirement corpus.
• Self-employed professionals looking for a disciplined investment vehicle.
• Anyone seeking to benefit from the NPS tax exemption provisions of the Income Tax Act.

Features and Benefits of NPS

Here are some of the main features and benefits of NPS:

• Tax Advantage: NPS provides enormous tax advantages. The contribution is deductible from tax up to ₹1.5 lakh under Section 80C and another ₹50,000 under Section 80CCD(1B), with a total tax relief of ₹2 lakh per annum. And, employer contributions (up to 10% of basic pay) are deductible under Section 80CCD(2) as well. You can read the difference between the Section 80CCD(1) and 80CCD(2) here.
• Investment Choice Flexibility: The investor can choose how his money is invested among equities, government debt, corporate debt, and other alternative assets. You can either have "Auto Choice," where the asset allocation is automatically reallocated based on age, or "Active Choice," where you yourself make the allocation.
• Low Fund Management Fees: NPS has amongst the lowest fund management fees in the world (as low as 0.01%-0.09%) versus ULIPs and mutual funds, providing the maximum corpus in the long term.
• Partial Withdrawals: Partial withdrawals (up to 25% of own contribution) are allowed after 3 years for specified needs like children's education, marriage, house purchase, or critical illness without upsetting the scheme.
• Pension (Annuity) Post-Retirement: At retirement at age 60, 60% of the corpus can be taken (tax-free), and the rest 40% needs to be invested in an immediate annuity plan, which provides a consistent post-retirement income.
• Portability: Your PRAN Number is portable from employer to employer and from place to place, so it's suitable if you have a remote job.
• Choice of Fund Managers: You can select and even change your pension fund manager if you are dissatisfied with returns.
• Transparent System: NPS furnishes extensive reports, online accessibility, and frequent updates, which render the system fully transparent.

If you're wondering about NPS comes under which section for tax advantage, then know that it mainly comes under Sections 80C, 80CCD(1), and 80CCD(1B) of the Income Tax Act.

What is the Public Provident Fund (PPF)?

The Public Provident Fund (PPF) is a long-term, government-backed small savings plan started in 1968. It's formulated to enable people to invest small sums at regular intervals and create a corpus at retirement time. The PPF is one of the most popular pension plans in India as it provides assured returns with a government guarantee. You just have to open a post office or bank PPF account, deposit ₹500 to ₹1.5 lakh every year, and get tax-free returns entirely.

Who can Invest in PPF?

Any person who is a resident of India can hold a PPF account. Certain primary eligibility criteria are:

• Only 1 PPF account is allowed per person.
• A minor can open an account for the PPF scheme but only under the supervision of his/her legal guardian.
• Non-resident Indians (NRIs) cannot open a new PPF account, though they may keep existing accounts that were opened when they were residents.

Features and Benefits of PPF

This is why the PPF scheme is most preferred to create a diversified investment portfolio:

• Guaranteed and Fixed Returns: There is a guaranteed rate of interest in the PPF scheme, which is historically revised and published every quarter by the government. It ensures safety, unlike market instruments.
• Safe Investment Channel: Since interest and principal of an account of PPF is assured by Government of India, it is fully safe from market fluctuations.
• Triple Tax Exemption (EEE): The investment amount (maximum ₹1.5 lakh in a year) is deductible under Section 80C, interest received is tax-free, and the maturity value is tax-free as well, making it one of the most tax-effective investments ever.
• Loan Facility: Loans are available against balance in PPF in 3rd to 6th financial year (upto 25% of previous preceding year-end balance), at the expense of liquidity without closing the account.
• Partial Withdrawals: Once you have completed 5 financial years, you can withdraw partially from your balance once in each financial year for purposes of emergency like higher studies or medical necessities.
• Account Extension: After your PPF account has first matured after 15 years, it may be extended for any number of 5-year periods, with or without further contribution, as you prefer.
• Flexible Investment Options: You can invest ₹500 to ₹1.5 lakh annually, either in a lump sum or in bigger instalments (max 12), with convenience and flexibility.

What Is the Difference Between NPS and PPF?

NPS and PPF are very similar but have their own differences that you should know about. Here are some of them:

NPS vs. PPF: Which Will Give Higher Returns?

When we compare the returns of NPF vs NPS, it can get very interesting because both of these two investment/saving schemes work on completely different modes.

National Pension System (NPS)

Your money in the National Pension System is invested in a mix of equity, government securities, corporate debt, and alternative investment funds based on the asset allocation you have opted for. Equity exposure is up to 75% (in Active Choice), so your returns now entirely depend on what the market does. Traditionally, NPS investments have given 12% to 14% returns every year over very long periods of time. But because it's market-linked, there's no security. Returns can fluctuate based on the ups and downs in the market, fund manager skills, and the overall economy.

Public Provident Fund (PPF)

Returns from the PPF Scheme are government-fixed and renewed quarterly. The interest rate that you get on a PPF is fixed at 7.1% per annum. The returns in PPF are not market-linked and hence are secure and predictable. Nevertheless, being government-fixed, the returns don't always beat inflation by a large amount, particularly if there is an inflation in the cost of living.

NPS vs. PPF: Summary

If you can tolerate higher returns and do not care about taking market risks, NPS can provide a greater thrust to your corpus within 15-20 years. However, if you like the safety and guarantee of your wealth growth, then go for PPF.

NPS vs. PPF: Lock-In Periods

The lock-in period is important because it informs you about how quickly you can take out your money when you actually need it. So, let's compare NPS vs PPF in this regard:

NPS Lock-In Period

Under National Pension Scheme, your money is locked for 60 years. So, if you are 30 and begin investing, you cannot withdraw your investment at will for 30 years. Even though partial withdrawals (25% of your contributions) are permitted after 3 years for pressing needs such as your children's education, house purchase, or serious illness, withdrawal in full is possible only after retirement.

If you wish to withdraw from NPS prior to age 60, at least 80% of your corpus can be used to buy an annuity and not more than 20% withdrawn as a lump sum.

PPF Lock-In Period

Investment in the PPF Pension Scheme is locked for 15 years from the date of opening the account. But it offers more flexibility:

• You can make partial withdrawals from the 7th year of finance.
• You can take out a loan against your PPF value after the 3rd year till the 6th year.
• You can re-open your PPF account after maturity in instalments of 5 years.

Summary

If you wish to create a retirement corpus where you don't require early access, NPS is ideal. But if you wish to have some flexibility for mid-term needs such as education, emergencies, or purchasing property, PPF provides better access.

NPS vs. PPF: Tax Benefits

Everyone loves a good tax-saving investment! Both NPS and PPF offer tax incentives, but the way they do it is slightly different.

Tax Benefits Under NPS

• In an NPS, investments up to ₹1.5 lakh can be deducted under Section 80C.
• An additional deduction of ₹50,000 is available under Section 80CCD(1B), making it a great bonus for high-income individuals looking to save more tax.
• In short, if you make maximum NPS contributions, you can get a total deduction of ₹2 lakh in a year.
• Maturity proceeds are only partially taxable. At retirement:
  • 60% of the corpus is exempt from tax.
  • 40% has to be invested in an annuity, and income on the annuity is taxable.

Tax Benefits Under PPF

• A contribution of up to ₹1.5 lakh a year is deductible under Section 80C.
• Interest earnings and maturity returns from PPF are entirely exempt from taxes under the "EEE" (Exempt-Exempt-Exempt) scheme.

Summary

• For higher annual contributions to be deducted from taxes, NPF is a winner hands down because of the additional benefit of ₹50,000.
• For completely tax-free maturity returns of the whole amount, PPF cannot be matched.

NPS vs. PPF: Risk and Return

Risk appetite plays a huge role in investment decisions, and that's where NPS vs PPF differ sharply:

Risk and Return Under NPS

Since the National Pension Scheme invests part of your money in equities and other market instruments, there is always an element of risk. However, equities tend to outperform other asset classes over the long run. This means that while short-term market fluctuations may affect your returns, historically, equity-linked instruments have created higher wealth for patient investors. That said, a downturn in the markets can impact your NPS corpus near retirement if not managed carefully.

Risk and Return Under PPF

The PPF pension Scheme is government-backed, offering guaranteed returns and complete capital protection. Your principal and the accrued interest are 100% safe, irrespective of market conditions, political changes, or global economic factors. However, the returns are capped, and during high inflation periods, your real returns (returns minus inflation) might turn marginal.

Summary

• If you can afford some risk for potentially better returns, NPS should be in your portfolio.
• If you cannot risk any part of your investment and want absolute safety, PPF is better suited.

NPS vs. PPF: Withdrawal Rules

How easily you can get your money out matters a lot, especially during emergencies or major life events. Let’s break down NPS vs PPF withdrawal rules:

NPS Withdrawal Rules:

• At Maturity (60 years):
  • Withdraw up to 60% of the corpus tax-free.
  • Remaining 40% must be used to buy an annuity from an insurance company, providing you with monthly pension post-retirement.
• Premature Withdrawal:
  • You can exit after 3 years, but you must use 80% of the accumulated corpus to buy an annuity. You can use only up to 20% for the lump sum.
• Partial Withdrawal:
  • After being invested for 3 years, you can withdraw up to 25% of your contributions (not the total corpus) for specific reasons like marriage, buying a house, education, or critical illness.
  • You cannot make more than 3 partial withdrawals.

PPF Withdrawal Rules:

• At Maturity (15 years):
  • Full withdrawal is allowed without any tax implications.
• Partial Withdrawal:
  • From the 7th year onwards, you can withdraw a portion of your balance once per year.
  • You can only withdraw 50% of the balance by the end of the 4th year.
• Loan Against PPF:
  • Between the 3rd and 6th year, you can take a loan against your PPF account balance at attractive interest rates.

Summary:

• NPS withdrawal rules are stricter because it's primarily a pension-focused investment.
• PPF offers more flexibility for interim withdrawals and even low-cost loans.

NPS vs PPF: Which is the Better Investment Option?

The decision between NPS vs PPF will vary from person to person and your individual financial objectives, risk-carrying capacity, and retirement saving requirements.

If you are someone who can absorb a small amount of market-linked risk and you want higher returns in the long run, the National Pension System (NPS) may be a better choice for you. NPS invests in a combination of equity, government bonds, and corporate debt instruments, allowing you to earn more on your money compared to a fixed-return product like PPF. With NPS tax exemption policies and the provision to select your asset allocation (Active or Auto Choice), NPS provides choices that can be suited to varied investment styles.

On the other hand, if safety, guaranteed returns, and ease of operation are more important to you, then the PPF Scheme cannot be beaten. With the backing of the government, the PPF pension scheme comes with a fixed interest rate adjusted quarterly, but is otherwise a sure thing. It's great for a conservative investor who does not want to go through the ups and downs of equity markets and yet wants stable growth. Also, as PPF has a lock-in period of 15 years (extendable in blocks of 5 years), it's ideal if you are planning for long-term goals such as children's education, marriage, or building a good retirement corpus.

Factors to Remember While Choosing Between NPS and PPF

Before you decide on which scheme you'll go with, here are some other factors that you need to think carefully about:

Tax Treatment at Maturity

• PPF has tax-free maturity proceeds. Whatever you deposit, earn, and withdraw is tax-free.
• Partial withdrawal in the National Pension System is tax-free up to 60% of the retirement corpus, and the rest 40% has to be utilised to purchase an annuity, which is taxable based on your income tax slab.

Liquidity and Lock-In Period

• PPF Scheme has a lock-in period of 15 years, although you can take partial withdrawals after the 7th year under specific circumstances. Loans against your PPF balance are also allowed after the 3rd year.
• National Pension Scheme is much more restrictive. Withdrawals before age 60 are heavily restricted and usually allowed only for certain purposes like critical illness, education, or purchase of a house.

Investment Flexibility

• With NPS, you have the autonomy to choose your fund managers, investment strategy (Auto or Active option), and asset allocation. This provides you with superb control over as much aggression or conservatism as you would desire for your portfolio.
• The PPF Pension Scheme is not flexible. Your money can only grow at the rate fixed by the government.

Returns Comparison

• NPS returns have mostly fluctuated between 12%-14% based on fund selection and market performance.
• PPF presently provides approximately a 7.1% compounding rate of interest, which is relatively more stable but generally lower than long-term equity-linked rates.

Retirement Planning Needs

• If your primary objective is to generate a pension stream in retirement, NPS is designed specifically for that purpose, particularly if you couple it with good annuity plans.
• If you need only a lump sum amount for any purpose in retirement, PPF may be more appropriate.

Government Control

• Both are backed by the government, but the PPF Scheme gives a guaranteed return, while the National Pension Scheme is market-linked with fund management controlled by the government. Hence, it's riskier than purely private equity funds but not completely risk-free.

Final Words

Both the PPF pension plan and the national pension scheme are great investment ideas for creating wealth in the long run. NPS is more suited for retirement-oriented individuals willing to embrace moderate risk; PPF is ideal for conservative individuals who look for complete protection and tax-free returns.

If you’re still unsure about the best way to plan your future finances, PNB MetLife offers a range of customised financial solutions designed to match your unique life goals. Visit our website and start your journey towards a secure and fulfilling retirement today!

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