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RETIREMENT PLANS BUYING GUIDE
:1800-266-9777
NPS vs PPF: Which is Better
Table of Content
1.What is NPS (National Pension System)?
3.Features and Benefits of NPS
4.What is the Public Provident Fund (PPF)?
6.Features and Benefits of PPF
7.NPS vs PPF: Analysing Investment, Returns, Safety, Taxation and Liquidity
8.Key differences between NPS and PPF
9.Similarities between NPS and PPF
10.NPS vs PPF: Which is the better investment option?
11.Other alternate investment option
12.Conclusion
To understand which of the options is better for investment, it is indeed wise to do a comparative study of NPS vs PPF.Let us start from the basics before we move to the difference between NPS and PPF.
What is NPS (National Pension System)?
The National Pension System is a government-sponsored and market-linked pension scheme that enables people to earn high returns from their investments over the long term within a mechanism regulated by the government. By investing in this scheme, one can create a retirement corpus and get a regular pension post-retirement while saving on income taxes.
Designed to provide the security of pension to the organized and unorganized workforce alike, NPS aims not only to provide financial security in retired life but helps one grow his/her money. However, one can get the fund redeemed only after retirement whereas early or partial withdrawals of the fund are allowed after 10 years only on specific grounds.
There are tax benefits available when you invest in NPS. Payments towards the scheme entitle you to a tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961. Tax exemption of an additional Rs 50,000 is also available under section 80CCD(1B).
Who can invest in NPS?
The National Pension Scheme is available to any citizen of India who falls in the age bracket of 18-70 years. One can avail of the benefits by joining the scheme and making regular investments in it. The following are the criteria to be eligible for investing in this scheme:
- You need to be within 18-70 years when you apply POP/POP-SP.
- The account holder needs to furnish relevant documents for the Know Your Customer (KYC) requirements.
Features and Benefits of NPS
Following is a list of different features and benefits of NPS:
Professional Fund Management
Tax Benefits
Flexible Withdrawal
Easy to Access and Use
Experience pension fund managers manage NPS funds. These professionals possess experience and sufficient knowledge to manage investments effectively. They target maximising returns while minimising risks. Investments are allocated carefully by respective fund managers across corporate bonds, equities and government securities.
Through regular monitoring and adjustments, fund managers align investments according to the market conditions. This way, NPS subscribers can benefit from expert management without involving in managing funds.
NPS has its glorious tax benefits for which it is the preferred choice of most investors. Contributions made to the NPS Tier I account attract tax deductions under Section 80C, and also deductions under Section 80CCD(1B) of the Income Tax Act, 19611, subject to defined limits. Investing in NPS Tier I also provided great tax benefits and secured a retirement era.
The National Pension Scheme aims at retirement security and financial stability during retirement. Upon attaining the age of 60, you can withdraw 60% of the pension corpus as a lump sum, tax-free, while the remaining amount will be utilized to procure an annuity. This is a stable source of income throughout your retirement days ensuring peace of mind and stability.
NPS applies to all Indian citizens aged 18 to 65 years, making it easy to access and use. It provides a user-friendly platform for managing withdrawals, contributions and investment strategies. It is however easy for applicants to access this account online anytime, ensuring transparency and convenience.
Moreover, NPS simplifies retirement planning for each applicant. Because of its easy-to-use interface and eligibility conditions, applicants consider this an appealing choice to save for their future.
What is the Public Provident Fund (PPF)?
Introduced in 1965, the Public Provident fund or PPF is a government-funded scheme that provides guaranteed returns on your investment through compound interest. With a lock-in period of 15 years, this savings scheme can help you build your retirement corpus over a long investment horizon. Currently, this scheme offers 7.1% interest that compounds yearly and is considered an ideal choice for those looking for a risk-free investment.
Anyone can join the scheme and invest in a PPF account to ensure a secure financial backup as well as enjoy tax benefits in the process. For deposits in a PPF account up to Rs 1.5 lakh a year, one can enjoy tax exemption under section 80C of the Income Tax Act, 1961.
The investments to the account need to be within a minimum of Rs 500 and maximum of Rs 1.5 lakh a year and up to 12 deposits are permissible annually. With the maturity of the account at 15 years, PPF allows withdrawals after 5 consecutive years of active operation under the following circumstances:
- To pay higher education fees
- To take care of medical emergencies (in case of critical or terminal diseases, backed by medical documents)
Who can invest in PPF?
Anyone who is a citizen of India and aged above 18 years is eligible to open a PPF account and invest in it. The scheme is not available to Non-Resident Indians (NRIs) or Hindu Undivided Families (HUFs). One can have only one PPF account to your name and joint accounts are not allowed. However, one can have an additional PPF account on behalf of someone who has an unsound mind or is a minor.
Features and Benefits of PPF
The distinguishing features and benefits of PPF are as follows:
Guaranteed Returns
Tax Benefits
Flexible Investment Amount
Partial Withdrawals
This is a major benefit of PPF. A PPF scheme is backed by the Indian government and thus there is less risk associated with losing money. This scheme moreover provides adequate returns. Also, if there are non-payable debts, they cannot be forwarded further to any court order.
PPF is an excellent choice for tax saving. It is indeed one of the best tax-exempt products available. It falls under Section 80C of the Income Tax Act, 19611 and provides benefits for tax deductions on contributions to PPF. Tax benefits apply to the interest accrued as well as on the final amount that shows up at maturity. This means from contributions to returns, it is tax-free. PPF offers a safer and more tax-efficient environment for growing savings with guaranteed returns.
The most important thing you need to know about investing is the return, Thus, one of the main advantages of the PPF account is that it offers good returns. Again, actually, you might open a PPF account with a minimum of Rs. 1000 and up to the maximum limit of Rs. 1,50,000.
You can choose to pay a certain amount each month or even deposit an entire amount at any one time of the year. Interest is earned on the PPF account at 7.1%, which is compounded annually.
One of the big advantages of a PPF account is that, based on the investments made and after 3 successful years in the account, creditors can allow you to take loans on your PPF. Even though it is a 15-year lock-in scheme, you can avail the loan facility after successful maintenance for 3 years.
One can avail of loans to the extent of 25% of the balance standing on account at the end of the 2nd year. This is a great option for emergencies.
Also, you can withdraw money partially from the PPF after five years, and if you want to close the account, you can discontinue. This is yet another great feature of the PPF.
NPS vs PPF: Analysing Investment, Returns, Safety, Taxation and Liquidity
To figure out which investment plan is the most suitable form of investment for you, it’s important to analyse investment, returns, safety, taxation and liquidity. To compare these aspects and ascertain whether NPS or PPF is better, let us take a look at the following table.
Parameters |
NPS |
PPF |
Investment |
Minimum annual investment is Rs 6000, no upper limit
|
Minimum and Maximum annual investment are Rs 500 and Rs 1.5 lakh |
Returns |
High returns at around 12-14%, but with market risk and long investment horizon
|
Moderate but guaranteed returns at 7.1% compound interest currently |
Safety |
Low because it’s market-linked |
High because it’s risk-free |
Taxation |
Tax deductions up to Rs 2 lakh a year. 40% of NPS is tax-free hence considered as low exemption. |
Tax deductions up to Rs 1.5 lakh a year. Hence fully exempted. |
Liquidity |
Low because of the longer lock-in period |
Low because of the longer lock-in period |
Key differences between NPS and PPF
To get more clarity on National Pension Scheme vs PPF, it’s crucial to compare the key differences between the two. Here’s a table highlighting the differentiators.
Point of Comparison |
PPF |
NPS |
Rate of Interest |
7.1% (currently) |
10-14% (based on market) |
Eligibility |
Indian citizen above 18 years. NRIs can’t avail. |
Indian citizen within 18-70 years. NRIs can open an account. |
Maturity of scheme |
15 years. Can be extended by 5 years. |
Not fixed. Can vary between 60 to 70 years of age of the subscriber. |
Investment |
The minimum and maximum annual investment are Rs 500 and Rs 1.5 lakh. |
The minimum annual amount is Rs 6000 with no upper cap. |
Tax deductions |
Fully exempted as tax deductions are available up to Rs 1.5 lakh a year under section 80C. |
Partial exemption as yearly payment up to Rs 1.5 lakh is tax free under section 80C. Additional deductions are available up to Rs 50,000 under section 80CCD (1B). |
Withdrawals |
Partial withdrawals allowed from 7th year onwards under specific grounds. |
Partial withdrawal allowed after 10 years. But to exit before retirement, 80% of the corpus has to be used in buying an annuity plan. |
Freedom to choose how to invest |
No. |
Yes, you can choose the investment portfolio. |
Returns |
Guaranteed returns as these are risk-free investments at government-regulated interest rate. |
Returns depend on market volatility. |
Need of buying annuity plan at maturity |
Not needed. |
You need to buy an annuity plan with at least 40% of the maturity corpus. |
Similarities between NPS and PPF
Not just differences, there are certain points of similarities too when you compare NPS vs PPF. Let us check them out in the following table.
Similarities of NPS and PPF |
Both are meant for retirement corpus building |
Both offer tax benefits |
Both are long-term investment options |
Both require opening an account |
Both offer partial withdrawals |
No tax on returns or maturity corpus for both |
NPS vs PPF: Which is the better investment option?
Going by the similarities and differences, both have certain features that can appeal for retirement planning to those looking to create a solid financial backup as a retirement plan. However, which of the two will suit an investor more, will depend on his/ her personal preferences, needs and convenience. For example, if an individual is risk-averse, PPF is a wiser bet, while NPS is a more alluring pick for someone eyeing higher returns, even at greater risk. Whereas, in terms of life goals, NPS is a better choice when there’s less liability, while one should rely more on PPF if savings are needed to fund the child’s education or marriage.
Other alternate investment option
If you are looking for investment opportunities that can help you with guaranteed returns then you can definitely evaluate life insurance savings plan. This type of financial instrument can help you build your corpus as well as provide life cover. Savings plan can help you fulfil your financial goals as well as secure your financial future.
Conclusion
Both NPS and PPF play important roles in an investor's financial plan, although none provides direct life insurance. That is where life insurance and annuity plans come in to help you finish your retirement planning.
Individuals prepared to incur market risks in exchange for possibly greater returns and flexible contributions will benefit from NPS, whereas PPF is best suited to those who value assured returns, tax efficiency, and capital preservation. However, depending simply on NPS or PPF for permanent income after retirement may not be sufficient.
By complementing your retirement portfolio with HDFC Life Annuity Plans, you may assure a guaranteed lifetime income and avoid outliving your investments.
Whether you choose for immediate payments under Immediate Annuity or Deferred Annuity for long-term financial stability, HDFC Life can help you transform your investments into a consistent income stream, ensuring your retirement years.
Choosing properly between PPF, NPS, and annuity plans can lead to a stable and profitable financial future. Assess your risk tolerance and retirement requirements to find the optimal blend of market-linked growth, guaranteed returns, and lifetime income stability.
FAQs about NPS vs PPF
Q. Can I have NPS and PPF both?
A. Yes, you can invest in both NPS and PPF. But you can claim a total tax deduction of up to Rs 1.5 lakh a year for the cumulative investment in the two schemes. In addition, another deduction of up to Rs 50,000 can be claimed for the annual investment in NPS.
Q. Which one is more suitable for retirement planning, NPS or PPF?
A. NPS and PPF offer you two different types of investment opportunities in terms of the risk associated. NPS being market-linked, can offer you higher returns at higher risk. PPF on the other hand is a traditional scheme with guaranteed returns. If you are looking to fund family goals like your child’s education or marriage or buying a home, a safer investment like PPF should be ideal. But if you have the willingness and ability to take risks and look forward to growing your wealth, NPS can be profitable.
Q. How does PPF differ from NPS?
A. PPF offers you guaranteed returns at relatively lower interest rates through the power of compounding. NPS can generate higher returns at 10-14% but there’s market risk involved. Furthermore, PPF is fully exempted from tax as the maximum amount you can deposit is Rs 1.5 lakh per year which is equal to the maximum tax deductions available under section 80C of the Income Tax Act, 1961. But NPS is partially tax exempted as there’s no upper limit for the investment.
Q. Which one is better, PPF or NPS?
A. NPS can fetch you 10-14% of returns but with market risks alongside. But since the scheme is under the regulation of the government, chances of malpractices are nominal. PPF on the other hand, provides completely safe investment and guaranteed returns as it is backed by the government and not linked to the market. So, it’s important to identify which suits your needs and then make the suitable investment.
Q. Are NPS returns tax-free?
Yes, about 60% of the total amount withdrawn in lump sum is exempted from taxes.
Q. What are the risks of NPS?
NPS, being a market-linked investment scheme, its returns depend solely on the performance of the market. Investing in equity is associated with high risk but offers attractive returns.
Related Articles
- What is NPS (National Pension Scheme): Benefits, Eligibility and Features?
- NPS for NRI: Benefits, Eligibility and How to Invest?
- Annuity Plans for National Pension System – NPS
- Superannuation – How It Works, Tax Benefits and types
References
https://cleartax.in/s/nps-national-pension-scheme
https://www.hdfcpension.com/buy-nps/
https://www.hdfcpension.com/blog/everything-you-need-to-know-about-your-nps-tier-1-account/
https://www.hdfcpension.com/blog/nps-tier-1-vs-tier-2-understand-the-best-option-for-your-needs/#:~:text=The%20NPS%20Tier%202%20account%20is%20voluntary%20and,from%20the%20Tier%202%20account%20at%20any%20time.
https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx
https://npscra.nsdl.co.in/tax-benefits-under-nps.php/all-citizens-faq.php
https://groww.in/p/savings-schemes/public-provident-fund-ppf#:~:text=Public%20provident%20funds%20provide%20the,against%20PPF%20is%2036%20months.
https://groww.in/p/savings-schemes/ppf-limit
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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1. Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
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