NPS vs PPF

NPS vs PPF
Creating a retirement portfolio after a certain age is essential for salaried individuals to make their future financially secure. To help such people with the same, the Government of India offers two savings schemes viz. National Pension Scheme (NPS) and Public Provident Fund (PPF). Both are long-term savings instruments providing income tax benefits.

The following are the highlights of NPS vs PPF to aid individuals to choose the right plan and invest accordingly.

National Pension Scheme (NPS)
The Government of India started the National Pension Scheme on 1st January 2004 after it decided to stop defined-benefit pensions. The Pension Fund Regulatory and Development Authority (PFRDA) oversees every operation about NPS.

Initially, the scheme was available only to government employees; since 2009, every individual between the ages of 18 and 65 can opt to avail of the benefits offered under this investment scheme.

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Subscribers can create two types of accounts –

Tier I –Tier I accounts are subject to strict premature withdrawal conditions. Investors opening such accounts provided with a Permanent Retirement Account Number (PRAN).
Tier II – Tier II accounts can be created only by those who already have an active Tier I account. These accounts offer more flexibility in withdrawal terms, unlike the former.

Few of the features of the National Pension Scheme are –

Income tax benefits
Subscribers can claim an income tax exemption of up to Rs.1.5 lakh with NPS under Section 80C, Section 80CCC, and Section 80CCD (1) of the Income Tax Act, 1961. On top of that, they can avail of an additional benefit of Rs.50,000 under Section 80CCD(1b).

One of the highlighting points of NPS vs. PPF is that income tax benefits with the former are substantially higher.

Premature withdrawal and exit facility
For Tier I subscribers, the partial withdrawal limit is set at 25% of the total contribution. However, the account must be at least ten years old to be eligible for such withdrawals.

In case of partial exit, 20% of the total contribution is eligible for withdrawal, while the remaining 80% will be use to purchase an annuity or pension plan.

Two different methods of investment
The scheme allows subscribers to invest in two different methods –

Auto choice –This option is for those who do not have the necessary knowledge to manage or make any investment decisions.
Active choice – This option enables subscribers to invest in equity (E), corporate debt (C), government/gilt bonds (G), or alternative instruments (A).

Public Provident Fund (PPF)
Public Provident Fund (PPF) is a long-term savings scheme offered by the Government of India via post offices and commercial banks. This scheme also provides income tax benefits.

One of the crucial points in the National Pension Scheme vs PPF is that the latter is not available for HUFs and NRIs.

Some of the features of this scheme are as follows –

Income tax benefits
Public Provident Fund allows income tax benefits of up to Rs.1.5 lakh under Section 80C of the ITA. It should noted here that in NPS vs PPF, the latter does not offer tax exemptions under Section 80CCD (1b).

Lock-in period and premature withdrawal
This investment option comes with a lock-in period of 15 years. However, account-holders will be able to withdraw from the 5th year onwards prematurely.

The premature withdrawal limit is capped at 50% of the available funds at the end of the 4th or that of the preceding year, whichever is lower.

Availability of loans against the deposit
The account holders are eligible to avail of a loan against their deposits between the 3rd and the 6th year. Currently, the rate of interest on such loans is 1% per annum.

Both NPS and PPF are stable investment options with guaranteed returns. Nonetheless, individuals must ensure that they know about the features of each of these products before choosing one to invest in.