Two of the most popular investment and savings schemes in the country are the National Pension Scheme (NPS) and Public Provident Fund (PPF). These are both essentially savings schemes for life post retirement. Since life expectancy is expected to increase, but the age of retirement stays the same, people are all the more aware of the importance of post-retirement planning in order to continue having the same comfort and independence as before. While there are many ways to go about this, whether by saving money or by investing it, the NPS and the PPF are two of the most popular ones because of various reasons.
NPS or PPF – A comparison
Both NPS and PPF are long-term financial commitments that require setting aside a specific amount to be paid a couple of times a year or once a year, depending on your budget. So, making the choice between NPS and PPF has to be done with care and after proper research.
The first step is understanding what NPS and PPF are individually, then comparing the two to see which is better suited for your requirements, lifestyle, and budget. Here's all you need to know to decide which is better – NPS or PPF?
Eligibility for NPS Vs. PPF
PPF is open to all residents of India with the exception of NRIs. However, NRIs are eligible for the NPS as it is open to anyone in the 18-60 age group.
The lower limit of investment amounts for NPS is Rs.6,000 over a period of 4 to 12 times in a year. The minimum contribution is Rs.500 for PPF. However, the upper limit of investment amounts differs. For PPF, the amount is Rs.1.5 lakh whereas for NPS there is no upper limit as long as the contributions are within 10% fo the total salary or total income (in case of the self-employed). Under NPS, it is possible to get tax benefits for up to Rs.1.5 lakh if the minimum contributions are within 10% of the total salary.
Rates of return
There are fixed returns for PPF for any given period. If any changes are made, notifications are made well in advance. Returns on both PPF and NPS are market-linked. For NPS, however, returns can vary as it depends on various factors, such as the fund manager’s performance and the asset class combinations. Short-term returns can thus be volatile in the case of NPS. For this reason, long-term returns are emphasised for NPS. It is also considered to be much safer than mutual funds because only 50% of the contributions are used for equity trading. You get appreciation of investment as well as safety of your capital in NPS.
Return of investment
The return of investment in both PPF and NPS is market-linked. However, PPF gives fixed returns. NPS gives higher returns because a portion of the contribution is invested in equity trading which provides higher returns.
Benefits of NPS and PPF
There have been recent changes in NPS because of certain government policies. Approximately 60% of the corpus that can be withdrawn on maturity is now completely tax exempt. For PPF, the maturity amount that is withdrawn is 100% tax-free. You are also free to do as you wish with the amount on maturity in PPF. It can be kept as cash or invested in bank deposits, stocks, etc. For NPS, there is a proposal to make it tax-free on withdrawal, but this full tax exemption will be for 60% of the corpus that can be withdrawn on maturity. The remaining 40% has to be compulsorily invested in annuity plans as this is how the pension payouts are given regularly. However, this remaining 40% is also tax exempt.
Freedom of equity investment
Subscribers of PPF can have exposure to equity of up to 15%. This may be removed soon. However, subscribers to NPS have the option of equity exposure of up to 75%. This comes under the option of active choice, where the subscriber decides where it has to be invested. This 75% makes a big difference in the returns in the long run. Inflation-adjusted rates of NPS compared to PPF were significantly higher over a 5-year period.
A PPF account can be prematurely closed only after completing 5 years and under certain conditions with a penalty amount of 1% lesser interest. It can also be closed after the completion of 5 years, again for very specific reasons. From the 7th year onwards, one partial withdrawal can be made every year. This is, however, limited to be 50% of the total balance that is at the end of the 4th year which precedes the year of the withdrawal or the year that immediately precedes the withdrawal year (whichever is lower).
NPS withdrawals can be made after at least 3 years are completed but should not exceed 25% of the contributions that have been made so far. During the subscription tenure, withdrawal can be done a maximum of three times, that too for very specific reasons.
There are advantages to both NPS and PPF. So, deciding which one to take depends on one’s requirements. A combination of both NPS and PPF would be a smarter choice for investors in the long run. This would give a retirement corpus that is better diversified which gives both appreciation of investment and protection of capital. Tax benefits are definitely a plus. So, take the long-term view and invest in both for a better life post retirement. For more information click here.