NPS vs PPF: Where should you invest for maximum gains?

For many Indians, planning for a secure retirement is a top priority. It is, therefore, crucial to choose the right investment option. There are a lot of retirement schemes and pension plans available to invest in. However, the most popular options backed by the government are the National Pension Scheme (NPS) and the Public Provident Fund (PPF).

What is the National Pension Scheme (NPS)?

NPS is a government-sponsored retirement savings scheme in India, which enables individuals to earn higher returns from their investments over the long term. It is a defined contribution scheme where the contributions made by the subscribers are invested in various asset classes.

Any Indian citizen between the age of 18 and 70 can join NPS voluntarily. There are two types of accounts: Tier I and Tier II accounts.

Tier I account: It is a retirement account, where the applicants can claim tax benefits against the contributions made. The contributions are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act.

Tier II account: It is a voluntary savings facility and not a retirement account. Thereby, the applicants cannot claim any tax benefits against contributions made to this account.

The maturity tenure for NPS is flexible and it allows contributions until the age of 60 years, with an option for extending the investment period to 70 years of age.

What is Public Provident Fund (PPF)?

PPF scheme is a long-term investment option that provides a favourable rate of interest and returns on the invested amount. The interest earned and the returns are exempt from the Income Tax.

Any citizen of India can invest in PPF. A citizen can have only one PPF account unless the second account is in the name of a minor. However, NRIs and HUFs are not eligible for this scheme.

The maturity period of the PPF account is 15 years. After 15 years, it is possible to extend this duration by 5 years at a time, with or without additional contributions.

Comparison between NPS and PPF

Investment risk and safety: NPS is subject to market fluctuations and carries some level of risk, but it is closely regulated and monitored by the Pension Fund Regulatory and Development Authority (PFRDA), which cuts the possibility of malpractices. However, PPF is fully government-backed, providing guaranteed returns with minimal risk.

Liquidity: NPS offers better liquidity than PPF since it permits partial withdrawals on multiple occasions. In contrast, PPF permits partial withdrawals after a specific lock-in period and up to a certain limit.

Returns: NPS yields as high as 10% in certain situations, while PPF offers relatively lower but consistent returns of approximately 7-8%.

Taxation: The NPS balance withdrawn upon maturity is exempt from taxes, while the annuity must be bought after the tax payment. On the other hand, investing in the PPF account up to ₹1.5 lakh annually makes one eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The interest earned on PPF is also tax-exempt, although it must be declared in the annual income tax return. PPF is under the EEE or exempt-exempt-exempt category.