It is vital to have a proper retirement plan for a respectable, independent, and secured life after your working years. Public Provident Funds and National Pension Schemes are two such government-backed retirement plans. The objective of these plans is to help a retired person secure his finances after retirement. The differences between NPS and PPF include structure, returns, risk, liquidity, and taxation, even though both are used to encourage savings on a long-term basis.
What is NPS?
The National Pension System (NPS) is a government-sponsored pension plan available to employees in the public and private sectors. Regular contributions to NPS accounts are made by participants throughout their working lives. The participant may withdraw a portion of the money accumulated in their NPS account on retirement, while the rest may be used to buy an annuity for income while they are retired.
Who can invest in NPS?
NPS is a long-term retirement savings plan that allows eligible individuals to build a structured pension corpus for their post-retirement years.
Any Indian citizen aged between 18 and 70 years old can deposit money into their National Pension System (NPS) account.
Eligible participants include both workers in the private sector and workers in the public sector or in the unorganised sector.
Military personnel are not currently allowed to open an NPS account.
Individuals who are mentally incompetent or are currently undergoing bankruptcy proceedings are not allowed to open an NPS account.
An individual wishing to open an NPS account will need to follow and fulfil KYC requirements to open the account.
What is PPF?
Public Provident Fund (PPF) is a government-backed investment scheme, widely preferred by investors looking to invest for the long term. It has a lock-in period of 15 years, after which you can withdraw the invested funds. The account is accessible only to residents of India. Hindu Undivided Families and Non-Resident Indians cannot invest in it. You can start investing with ₹500 annually and a maximum of ₹1.5 lakhs.
Who can invest in PPF?
The Public Provident Fund account is available to Indian residents, provided they fulfil the following criteria.
All Indian citizens between the age groups of 18 and 70 years are eligible to make an investment into the Public Provident Fund (PPF) after fulfilling the requirements of KYC norms.
The account holder must be of sound mind and not an undischarged insolvent.
Non-Resident Indians (NRIs) are not eligible to open a PPF account.
HUFs (Hindu Undivided Families) are also prohibited from investing money in PPF.
Difference between NPS and PPF
The following comparison highlights how the National Pension Scheme (NPS) and the Public Provident Fund (PPF) differ across these parameters.
Parameter |
NPS |
PPF |
Type of Investment |
Market-linked pension scheme |
Government-backed savings scheme |
Eligibility |
Indian citizens aged 18–70 years, including NRIs |
Resident Indian citizens above 18 years; NRIs and HUFs not eligible |
Investment Limits |
Minimum ₹6,000 per year; no maximum limit |
Minimum ₹500 per year; maximum ₹1.5 lakh per year |
Returns |
Market-linked returns |
Guaranteed returns at government-declared rate |
Risk and Safety |
Higher risk due to market exposure |
Low risk; capital protection assured |
Tax Benefits |
Deduction* up to ₹1.5 lakh under Section 80C and additional ₹50,000 under Section 80CCD(1B); only 40% corpus tax-free* at maturity |
Deduction* up to ₹1.5 lakh under Section 80C; maturity amount fully tax-exempt* |
Liquidity |
Low; partial withdrawals allowed after 10 years under specific conditions |
Low; partial withdrawals allowed from the 7th year |
Maturity Period |
No fixed tenure; typically between 60 and 70 years of age |
15 years, extendable in blocks of 5 years |
Freedom to Choose Investments |
Yes, subscribers can choose asset allocation |
No investment choice available |
Annuity Requirement at Maturity |
Mandatory; at least 40% of corpus to be used to purchase an annuity |
Not required |
Features and benefits of NPS
The key features and benefits of NPS are:
Professional fund management
NPS schemes are managed by professional pension fund managers, who have the knowledge and expertise to manage the schemes effectively. The motive behind the allocation of funds through the managers is to maximise returns while minimising risk.
By constantly monitoring and making appropriate changes to their portfolios, portfolio managers match their portfolios with prevailing market trends. This helps NPS members reap the benefits of professional management of their investments without having to necessarily manage them.
Tax benefits
The contributions made to Tier I of an NPS account are eligible for tax* deductions under Section 80C and an additional deduction under Section 80CCD(1B) of the Income Tax Act, 1961.
These tax* benefits not only result in tax savings but also assist in creating a secured retirement fund.
Flexible withdrawal options
The key objective of NPS is to ensure financial support in retirement. Once the age of 60 has been reached, the subscription holder can withdraw a maximum of 60% of the entire amount as a lump sum, which is exempted from tax*. The balance can be used to purchase a pension that generates a regular stream of income.
This ensures financial security in the long term as well as the ability to have flexibility after retirement.
Ease of accessibility and convenience
The NPS is accessible to Indian citizens between the ages of 18 and 65 years. The scheme provides a convenient online platform for its users to easily handle their contribution, investment, and withdrawal processes.
Its transparent procedures and online availability simplify retirement planning, making NPS a preferred source for long-term savings.
Features and benefits of PPF
The Public Provident Fund (PPF) offers several distinguishing features that make it a preferred long-term savings and retirement planning instrument.
Guaranteed returns and Safety
Since PPF is a government-backed scheme, the risks of losing capital are minimal. The rate of interest is declared by the government in a timely manner. Hence, predictable and stable returns could be expected.
In addition, the balance in a PPF account cannot be attached by court orders or creditors, thus safeguarding the balances against creditors for a longer period.
Tax benefits
PPF is one of the most tax-efficient* investments. The deposits made to a PPF account are eligible for deductions* under Section 80C of the Income Tax Act, 1961, within a certain permissible limit.
Furthermore, the interest earned and maturity amount are also tax-free*, and hence, PPF falls under the Exempt-Exempt-Exempt, or EEE, tax system. It can be considered one of the best long-term tax-free* savings instruments.
Flexible investment amount
Under the PPF account, investors can make contributions with a minimum of ₹500 per year, whereas the maximum allowed contribution stands at ₹1.5 lakh per financial year. Investors get the facility to contribute either on an instalment basis or make an overall lump sum contribution on the basis of financial convenience.
Loan and partial withdrawal facilities
Although it has a lock-in period of 15 years, it provides liquidity through loan and partial withdrawal facilities. The loan facility is available from the 3rd to the 6th year of the company’s finances. Partial withdrawal of funds can be made from the 7th financial year, according to specified conditions.
Conclusion
The NPS and PPF are two popular retirement savings options. An NPS is a good investment for investors who are willing to take moderate market risk for the potential benefit of higher returns. Individuals focused on long-term capital growth may find it appealing because of its flexible investment options and tax* benefits. The PPF, on the other hand, is suited to conservative investors who prefer guaranteed returns, capital safety, and tax* exemptions. PPF provides a secure retirement savings option due to its government backing and stable interest rate.
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