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National Pension Scheme (NPS) Or Public Provident Fund (PPF): Which One To Pick?

Although there are certain limitations in NPS, it scores over PPF as a retirement savings scheme on various grounds, say financial planners.
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Although EPF is an option for salaried employees only, PPF is for all.
Although EPF is an option for salaried employees only, PPF is for all.

Highlights

  1. In NPS, tax benefit is available for contribution up to Rs 2 lakh/annum
  2. NPS could offer better returns than PPF, analysts say
  3. NPS returns are volatile whereas PPF returns are fixed
Public Provident Fund (PPF) and Provident Fund (PF) take centre stage whenever savings for retirement come to mind for most of us. Although EPF or Employees' Provident Fund is for salaried employees only, PPF is for all. People have been investing in PPF - which provides secured return over the long term - for ages. However, the National Pension Scheme or NPS has been gaining lot of attention as a retirement savings product after the government provided additional tax deduction of Rs. 50,000 in Budget 2015-16. Under NPS, there are two types of accounts: Tier I and Tier II. While the Tier I account is non-withdrawable till the age of 60 except in specific situations, the Tier II account is a voluntary savings account. Subscribers to Tier II accounts can withdraw the money whenever they want.

Here are the key differences between NPS and PPF:

Who can invest?

A PPF account can be opened by any Indian resident. One can also open a PPF account in the name of his or her minor children and can avail tax benefit on the contribution. However, an NPS account can be opened by Indian citizens above 18 years and less than 60 years of age. Non-resident Indians (NRIs) can also open an NPS account, but they cannot open a PPF account.

Maturity

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. However, in case of NPS, 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.

(Read: Early Withdrawal From NPS Made Tax-Exempt: 10 Things To Know)

Investment limit

One has to contribute a minimum Rs 500 to a PPF account annually with the maximum amount capped at Rs 1,50,000. A maximum 12 contributions per year are allowed in PPF accounts. However, in case of NPS, the minimum contribution required is Rs 6,000. There is no limit on contribution as long as it does not exceed 10 per cent of your salary, or 10 per cent of your gross total income in case of self-employed. But tax benefit will be available only on Rs 1.5 lakh under Section 80CCD(1) of the Income Tax Act, and an additional Rs 50,000 will be available under Section 80CCD(2) - a total tax benefit of up to Rs 2 lakh.

Premature withdrawal/partial withdrawal: In case of PPF, partial withdrawals are allowed from the seventh year onwards with some limitation. One can also avail loan against his or her PPF account during the third and sixth financial years of opening the account with certain limitations.

In case of NPS, after 10 years, subscribers become eligible for early, partial withdrawal under specific circumstance like children's higher education or marriage, construction or purchase of house and treatment of critical illness (for self, spouse, children or dependant parents). But if you want to exit before retirement, you must use at least 80 per cent of the accumulated corpus to buy an annuity from a life insurance company including LIC.

Investment option

In case of PPF, you do not have any discretion in deciding where to invest your money. However, in NPS, you can choose from a mix of three funds - equity funds, government securities fund and fixed income instruments other than government securities. A subscriber is allowed to invest up to 75 per cent in the equity fund.

(Also Read: NPS Subscribers Can Shuffle Fund Allocation Twice A Year)​

Returns

For PPF subscribers, interest rate is announced every quarter by the government. In case of NPS, returns are market-linked. "In our view, the potential of returns in a market-related investment like NPS is higher than of a guaranteed return instrument like PPF/PF. This is due to two reasons, one is the choice of equity exposure in NPS and secondly the component of professional fund management," Manoj Nagpal, CEO of Outlook Asia Capital, told NDTV Profit.

However, Mr Nagpal added: "PPF continues to be an attractive investment in itself, for those looking at zero volatility and a guarantee (in return). On a risk-adjusted basis, PPF returns though will be lower, will not be subject to the vagaries of the market."  

Tax Treatment

PPF enjoys an EEE or 'exempt, exempt, exempt' status, where the amount you contribute (up to Rs 1.5 lakh), the return you get and the maturity amount, all are tax exempt.

However, NPS comes under an EET or 'exempt, exempt, tax' tax structure. This means that contributions to NPS and the growth in corpus are not taxed but the lump sum withdrawn is partially taxed. Lump sum withdrawals above 40 per cent of the maturity amount are taxable in NPS.

Annuity

At maturity, you have to mandatorily purchase an annuity for at least 40 per cent of the accumulated wealth in case of NPS. But in case of a maturity amount less than Rs 2 lakh, you have the option of complete withdrawal. However, in case of PPF, you are not required to buy any annuity at the time of maturity.

This is the reason NPS is purely a retirement savings scheme. You cannot use NPS for other purposes like children's education, daughter's marriage etc., which you can do with PPF.

Although there are certain limitations in NPS, it scores over PPF as a retirement savings scheme on various grounds, say financial planners.

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