When it comes to long-term investment options in the country, the two most popular plans are the National Pension System (NPS) and the Public Provident Fund (PPF). Both investment options are government-backed plans, and offer guaranteed returns. NPS is a market-linked savings scheme ideated by the Indian government to provide monthly income to subscribers after retirement. It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), and all citizens (except armed forces) can register for NPS.
PPF, on the other hand, is a long-term savings scheme offering fixed returns every quarter. Unlike NPS, PPF can be used for various purposes, and was launched in 1968 to encourage individuals to make small savings. Given their long lock-in periods, tax deductions under the Income Tax Act, and guaranteed returns, the NPS vs. PPF debate remains prevalent among Indian investors.
NPS vs. PPF – Decades-Long Debate
If you are a risk-averse investor looking for a long-term investment vehicle, two of the most popular options today are NPS and PPF. However, their objectives are different, along with their return rate frameworks. In practice, the returns from NPS rely on the performance of the fund manager. The returns from PPF, on the other hand, depend on the rate of returns on government bonds.
Considering their popularity, we quickly compare NPS and PPF, taking into account their returns, taxability, and other factors.
NPS vs. PPF – A Comparison
- Purpose: NPS is a retirement savings scheme launched by the Indian government in 2004, aiming to provide a pension to individuals upon retirement. PPF, on the other hand, is a long-term savings scheme introduced by the Indian government in 1968, and is primarily used for realising long-term goals, including saving for retirement.
- Eligibility: Initially, NPS was only offered to central government servants. Today, however, NPS is open to employees from the public, private, and unorganised sectors, along with self-employed individuals. Similarly, PPF is available to all Indian citizens, including salaried employees, self-employed individuals, and even minors with a guardian account.
- Investment Period: NPS is a retirement-focused scheme with a long investment period, and you must remain invested until you turn 60. You can also make partial withdrawals after three years, and withdraw up to 25% of your total contributions.
PPF has a fixed lock-in period of 15 years, but you can extend it in blocks of 5 years after maturity. Additionally, you can make partial withdrawals after 7 years in PPF.
- Returns: NPS offers market-linked returns, and these returns rely on the performance of the underlying investments made in different asset classes. These include equity, corporate bonds, government securities, and alternate assets. You can choose your investment option based on your risk appetite.
On the other hand, PPF provides fixed returns, and the Indian government declares the interest rate. The interest compounds annually, and is subject to revision every quarter. While historically, returns from NPS have been higher than PPF, they are subject to market risks.
- Taxability: When it comes to tax savings, NPS and PPF provide tax benefits.
Under Section 80CCD(1) of the Income Tax Act, contributions made to NPS are eligible for tax deductions of up to ₹1.5 Lakhs (old tax regime). Furthermore, you can get additional deductions of up to ₹50,000 under Section 80CCD(1B). Additionally, you can withdraw up to 60% of the accumulated corpus tax-free upon completing the tenure. However, 40% of the remaining amount is taxable, as you must invest it in an annuity.
PPF enjoys EEE (Exempt, Exempt, Exempt) status, and the contributions, interest earned, and withdrawals from PPF are tax-free. You also get a tax deduction of up to ₹1.5 Lakhs p. a. under Section 80C of the Income Tax Act.
- Flexibility: In the NPS vs. PPF debate, for investors, NPS offers greater flexibility in terms of investment. You can choose between different asset classes, and later switch between them during the tenure. When it comes to PPF, it has a fixed investment option of government securities.
- Maximum Investment Limit: NPS is a tax-saving tool that also allows you to invest a significant amount, as you can invest up to ₹1.5 Lakhs in a financial year. However, there is a cap on the tax deductions available under Sections 80CCD(1) and 80CCD(1B) of the ITA (under the old tax regime).
Similarly, PPF has a maximum investment limit of ₹1.5 Lakhs per annum.
Conclusion
NPS and PPF are both long-term saving schemes with different structures, lock-in periods, and returns. While NPS allows tax saving while being retirement-oriented, PPF allows you to accomplish long-term financial goals. Additionally, NPS provides market-linked returns and boasts higher historical returns compared to PPF. However, it comes with market risks, while PPF offers a fixed interest rate.