NPS vs PPF: Which one is better?

While every other person is talking about the likes of Bitcoins, we must not let our own age-old investment avenues take the back seat! That’s why we’ve come up with an article to clear all the clutter around two confusing and often misunderstood terms: NPS & PPF. If you’ve been using these terms interchangeably till date, this article will tell you why you were grossly wrong!

Indians being big on savings, are a huge potential market for providers of investment products. The investment options available to an individual in the current times are enormous. But as the number of these products increase, the complexities also multiply.

For an amateur, it can become difficult to choose among the heap, which is why they might run away from investing. Are you one of them? Don’t worry. We’ve got you covered.

Today’s article includes a detailed discussion about two such options available to most investors, National Pension Scheme (NPS) and Public Provident Fund (PPF). Let’s dive in and understand the intricacies of these and which one is the better one.

National Pension Scheme (NPS)

NPS is a government-controlled investment instrument started in 2004. Initially started for the government employees, it was later opened for all the citizens of the country in 2009. This pension scheme is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Like an EPF, both employer and employee can contribute towards an NPS fund. However, NPS is also available to self-employed individuals.

How does NPS work?

It is a voluntary retirement scheme wherein individuals can park in their surplus in regular intervals and reap its benefits post-retirement. Once retired, the investors are allowed to withdraw partly as a lump sum, and the remaining is received on a monthly basis. NPS acts more or less like the pension system that government or other salaried employees receive on retirement.

The funds invested in NPS are partially parked into equity securities. From the year the investor turns 50, the proportion in equity reduces by 2.5% every year. The companies chosen for equity are large-cap companies that provide stable returns for a longer period.

The NPS has been growing at a massive rate as shown in the picture below:

(Source: Statista)

Public Provident Fund (PPF)

PPF is another government-controlled investment product introduced by the National Savings Institute of the Ministry of Finance. The main intention was to encourage small investors to invest their surplus.

How does PPF work?

PPF is like any other low-risk investment options available. An individual of any age can open a PPF account and deposit funds either as a lump sum or on regular intervals. A minor is also allowed to open an account under the supervision of a guardian.

The government announces the interest rate on PPF every quarter. The interest is compounded annually and is paid on 31st March.

Once the fund matures, the amount can be withdrawn fully or can be extended for a block period of 5 years with or without the additional contribution of the principal.

NPS vs. PPF

Both NPS and PPF are considered long term investment options. There are also a few significant differences between the two. Let’s look at them in detail.

• Any individual aged between 18-65 years can invest in NPS, whereas there is no age restriction for one to invest in PPF.
• There is no citizenship restriction for NPS, however, all individuals except NRI can invest in PPF.
• NPS is a retirement-focused fund. PPF is not.
• The interest received in NPS fluctuates with changes in the market, whereas, for PPF, the interest rate depends on the interest rate of government securities.
• The minimum investment in NPS is Rs. 1,000 and in PPF is Rs.500.
• There isn’t a maximum limit for an individual to invest in NPS. On the other hand, for PPF, the maximum limit is Rs. 1.5 lakhs per year.
• Amount invested in NPS can be withdrawn only at retirement, that is, 60 years, with certain exceptions. PPF funds can be withdrawn after a lock-in period of 15 years.
• There is an extension of maturity period available to both of these. NPS provides an extension up to 70 years, and PPF provides for a block period of 5 years.
• Both are allowed to a premature partial withdrawal of funds. NPS funds can be withdrawn for specific reasons. PPF can be withdrawn after the first five years.
• NPS accounts can be opened through the employer or online through eNPS. PPF accounts can be opened in designated branches of India Post. There are also banks that provide online facilities for the same. 
• NPS does not provide you with a facility of loan. On the other hand, personal loans can be availed based on the balance in the PPF account.

Which one is better?

Both of them exist with a unique set of pros and cons. Both are among the best options for a risk-averse investor. And are surely safe in terms of principle.

If you are looking for negligible risk, PPF is the one for you. However, the returns are lower.

NPS is slightly riskier as it includes an equity component but provides higher returns.

Either of the options also provides tax benefits. In NPS, the tax benefit of upto Rs 2 lakh can be availed. Returns received on PPF are completely tax-free subject to a maximum contribution of Rs.1.5 lakhs. 

In NPS, the lump sum withdrawal upon maturity (maximum limit 60% of the fund) is tax-free, but the amount receivable on a monthly basis post that (40% of the fund), is taxable. The lock-in period is another factor that should be taken into consideration.

There are free PPF and NPS calculators available online that can help you determine the returns you could earn with the funds available with you. 

Final Words

In conclusion, financial planning is a very subjective concept. There are various factors like financial goals, surplus funds, liquidity requirement, risk appetite, tax exemption, etc., that affect one’s financial decisions. Fund managers and other experts can provide you with the various alternatives available and explain their intricacies.

But the onus of the decision is finally on you! So it’s advisable to do your own research and check if a particular investment avenue fits the bill.