Difference between NPS and PPF, Which is Better?

Among several investment tools in India, the National Pension Scheme and the Public Provident Fund are the most common options. However, when it comes to returns, interest rates etc., investors often get confused between the two plans. Therefore, it is necessary to understand both the products in detail.

In this article, you will find answers to questions like can I have both PPF and NPS, how is NPS different from PPF, and more.

Without much ado, let’s begin!

NPS vs PPF

Simply put, NPS is a market-dependent pension savings scheme launched by the Government of India to provide financial aid to retired individuals. Therefore, returns on NPS depend on the market and pension fund manager’s performance.

PPF is a government-backed tool that is not specific to pensions, and it has fixed returns. To understand the details of each product, one needs to draw a comparison between PPF and NPS.

In the following section, we will compare PPF and NPS to help you choose the best investment tool.

Difference between NPS and PPF

Investments

In NPS, the minimum age of investment is 18 years, whereas the maximum age is 65 years. However, there are no age restrictions in PPF investment. Even minors can invest in it along with guardians. Also, the period of investment for NPS subscribers is till their superannuation or 60 years of age, and that for PPF investors is 15 years. The extension allowed for ones investing in NPS is till 70 years of age. Similarly, for PPF ones, the period of extension is for a block of 5 years.

Further, minimum and maximum investment amounts for PPF candidates are ₹500 per year and ₹.1.5 lakhs per year, respectively. On the other hand, the minimum investment amount for an NPS subscriber is ₹1000 per year, and there is no maximum limit for salaried personnel investing in this savings scheme.

However, self-employed individuals can invest a maximum of 20% of gross total annual income.

Safety

As NPS returns depend on market performance, it is generally not considered a safe option. The ups and downs of a market will directly affect your return amount in this scheme. Further, NPS returns are also dependent on a pension fund manager’s performance. Therefore, if you are not satisfied with this performance, you can swap managers.

Coming to PPF returns, one can rule out any risk of defaults as it comes with fixed returns.

Returns

PPF investments have fixed returns. Every quarter, the exact rate of return is set. The table given below shows PPF return rates for the current quarter and for the past two years:

Period	Rates
April-June 2021	7.1%
January-March 2020	7.1%
October – December 2020	7.1%
July – September 2020	7.1%
April – June 2020	7.1%
January – March 2020	7.9%
October – December 2019	7.9%
July – September 2019	7.9%
April-June, 2019	8.0%
January-March, 2019	8.0%

On the other hand, NPS returns vary depending on a fund’s performance. Here is a table showing the performance of some NPS equity funds.

Pension Funds	3-year Returns	5-year Returns
ICICI Pru. Pension Fund Mgmt Co. Ltd.	14.70%	50.10%
UTI Retirement Benefit Fund	2.40%	6.63%
LIC Pension Fund Ltd.	8.20%	41.50%
Kotak Mahindra Pension Fund Ltd.	25.40%	57.30%
SBI Pension Funds Pvt. Ltd.	14.80%	51.80%

Therefore, investors looking for details on NPS vs PPF returns can refer to the above tables.

Taxation

Under Section 80C of the Income Tax Act, PPF investment up to ₹1.5 lakhs will get you a tax deduction. PPF interests are exempt from taxes after making a declaration in the annual income tax return. The maturity amount related to PPF is also exempt from taxes. Therefore, PPF investors can enjoy a relaxed tax treatment.

Additionally, NPS investments up to ₹1.5 lakhs are tax-deductible under Section 80C.

However, contributions have to be less than 10% of your salary. Upon reaching the maturity period, one can withdraw 40% of the NPS balance without paying any tax.

The other 40% must be utilised to buy an annuity which will attract a tax. After paying the tax, one can withdraw the balance of 20% or utilise it in buying an annuity.

Eligibility

Indian citizens can invest in PPF. One person can have only a single PPF account unless the next account is in the name of a minor.

Any Indian citizen between the ages of 18 and 65 can invest in NPS. Additionally, NRIs can also invest in NPS.

Where to Open an Account

You can open a PPF account by visiting any designated bank branch or India post office. In addition to this, several banks allow an online facility to open a PPF account and make investments.

In case an individual is investing in NPS as part of his salary, he can open the account through his employer. However, anyone new to this saving scheme can open his account with a Point of Presence (POP) or online through eNPS.

Is NPS Better than PPF?

From the aforementioned pointers, it is clear that both investment tools have pros and cons. PPF generates fixed returns on the fixed income category, whereas equity pension funds under NPS can deliver higher returns in the long term. However, PPF investments come with lower risk as compared to NPS investments which depend on markets.

Further, investing in NPS will enable you to create a tax-efficient retirement corpus if you belong to a higher tax bracket.

In case you have less than 15 years left until your retirement, PPF investment might not be a viable option for you. However, NPS can still help you create a retirement corpus to secure your finances.

Therefore, there is no exact answer to the above question. Depending on the type and purpose of investment, and the risk-taking capability of an investor, one can choose any one of the above products.

Comparing NPS and PPF: Interest Rates and Returns

Here is a table summing up the above points regarding NPS vs PPF. In addition to the NPS and PPF interest rates, you will find various other factors in the following table.

Features	PPF	NPS
Interest rates	7.1% in Q2 FY 2020-21	12%-14%
Returns	Decided by the government	Market-linked rates
Partial withdrawal	Allowed from 7th year onwards. One can also secure a loan during the 3rd and 6th financial year of account opening.	Individuals can opt for early and partial withdrawals after ten years. In case a subscriber plans to exit before retirement, he needs to buy an annuity with 80% of the accumulated corpus.
Investment style	Fixed as per the government regulations.	One can choose between equity funds, government securities funds and fixed income instruments while investing in NPS.
Annuity	No requirement for buying annuities.	One needs to buy an annuity with 40% of the NPS balance after retirement if the balance is more than ₹2 lakhs.

Can You Invest in Both PPF and NPS?

In case you wish to make higher contributions to your retirement goal, you can invest in both PPF and NPS. One can choose PPF investments for a fixed income part of his portfolio and NPS for market-linked returns.

Therefore, now that you have known everything about NPS vs PPF, you can apply for any one or both financial instruments as per your requirements.

Frequently Asked Questions

✓ Which financial tool will be liable in case of debts – NPS or PPF?

PPF would not be liable for debts, as it has fixed returns as decided by the government. Being a market-linked scheme, the NPS will be liable for debts.

✓ Between NPS and PPF, which investment option generates higher returns?

NPS investments mean investing in equity funds that are known to generate higher returns as it depends on markets. However, the risks are higher in this case. Whereas PPF investments have fixed returns which are low but risk-free.

✓ Which product is better if I want to finance my children’s education?

NPS is a retirement savings option that accumulates funds for any financial needs after retirement. This means that an individual can utilise part of the NPS balance after 60 years of age, and the rest needs to be utilised for buying annuities. However, in PPF, one can opt for partial withdrawals and have a lock-in period of 15 years, making it an obvious choice for planning to finance a child’s education.