How NPS and PPF Help in Building a Retirement Corpus?

Written by : Knowledge Centre Team

2022-11-02

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NPS and PPF are two popular retirement savings schemes in India. Both offer income tax benefits and are long-term investment options.

National Pension System (NPS) was introduced in India on 1st January 2004 to provide old-age income security to all citizens of the country. It is a defined contribution pension scheme where the central Government, state government, private sector employees, and even self-employed professionals can open an account.

PPF scheme was introduced in India in 1968 to encourage small savings by offering a safe and secure investment option with attractive interest rates. The scheme is administered by the Central Government and is currently available through select banks and post offices.

What is National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a retirement savings scheme introduced by the Government of India. NPS account can be opened by any Indian citizen between the age of 18 and 60.

The scheme offers two investment options:

Tier I and
Tier II account

Tier I account is a non-withdrawable account (until the age of 60) while a Tier II account is a voluntary, withdrawable account.

NPS scheme offers several features and benefits such as:

1. Flexibility:

Investors can choose from a variety of investment options and can switch between these options as per their needs and risk appetite.

2. Portability:

NPS account is portable, which means that it can be transferred from one provider to another without any hassle.

3. Affordability:

NPS is a low-cost investment option as the expenses associated with it are much lower than other investment options such as mutual funds.

4. Tax Benefits:

Investments in NPS are eligible for tax deductions under Section 80C of the Income Tax Act.

5. Withdrawal:

Partial withdrawal from an NPS account is allowed for certain purposes such as higher education or the marriage of a child.

What is Public Provident Fund (PPF)?

Public Provident Fund (PPF) is a long-term savings scheme managed by the Indian government. It was introduced in 1968 to provide financial security to the citizens of India.

A PPF account can be opened with a bank, post office or any other authorised financial institution.
The minimum amount that can be deposited in a PPF account is Rs. 500 and the maximum amount is Rs. 1,50,000.
The tenure of a PPF account is 15 years, which can be extended for a further period of 5 years.
The interest rate on a PPF account is fixed by the government and is currently at 7.1% (for the Oct-Dec quarter of FY 2022-23).
The interest earned on a PPF account is exempt from income tax.
The maturity amount of a PPF account is tax-free.
A PPF account can be used as collateral for taking a loan.

Difference between NPS and PPF

NPS Tier-I Account	PPF Deposits
Market-linked investment	Fixed-income investment
Lock-in until retirement or the age of 60	PPF has a lock-in period of 5 years before partial withdrawal
Multiple asset allocation options	One standard account
Invest in Equity, Corporate Bonds, Government Securities	Invest in a single account that gives guaranteed and fixed returns
Better suited for retirement savings	Suitable for any long-term goal and financial safety of family
Additional tax benefit of up to Rs 50,000 on additional self-contribution (total deduction up to Rs 2 lakhs)	The total tax deduction benefit is limited to Rs 1.5 lakhs
Can be attached by a court of law and CBDT against personal debt, income tax dues	Cannot be attached by a court of law. Only CBDT can attach the PPF balance against income tax dues
Can be opened only in the name of the contributor	You can open in the name of a family member or minor, except your total contribution should remain below Rs 1.5 lakhs
NRIs can invest in NPS Tier-I account	NRIs cannot invest money in PPF
No loan facility from the NPS account against your balance	You can take a loan from your PPF balance from the third to fifth financial year of the account
You can invest in NPS up to the age of 70 years	You can extend PPF accounts for a lifetime in batches of 5 years after maturity with or without the contribution
At maturity, you can withdraw only 60% corpus tax-free	The entire fund value is tax-free at maturity
Your employer can also contribute to your NPS account	Only you can contribute to your PPF account

National Pension Scheme (NPS) and Public Provident Fund (PPF) are two of the most popular investment schemes in India. The NPS is a defined contribution pension scheme whereas the PPF is a defined benefit pension scheme. Under the NPS, the investor has to contribute a fixed sum of money every month towards his pension fund. The amount of pension received by the investor depends on the performance of his investment portfolio.

NPS offers more flexibility to the investor in terms of investment options. The investor can choose to invest in any of the four asset classes – equity, debt, government securities and corporate bonds.

Historical Returns

NPS returns are linked to the market and your asset allocation choices. On the other hand, PPF returns are declared by the central government every quarter.

Returns of NPS and PPF are shown in the table below.

Period	NPS*	PPF
1 Year	14%	7.1%
3 Years	7.9%	7.35%
5 Years	10.3%	7.61%

* As on October 2022. Returns are subject to market risk and performance.

Withdrawal

Withdrawal of NPS and PPF The NPS scheme allows a partial withdrawal of funds after 10 years of investment. After 60 years, the account holder can withdraw 100% of the funds from the scheme. The PPF scheme allows partial withdrawal from the account after the completion of 7 years. After 15 years, the account holder can withdraw the entire money from the saving scheme.

No investment is completely safe and there is always a certain amount of risk associated with any investment. However, one of the best ways to reduce risk and increase safety is to diversify one's investment portfolio.

This means implies investing in diverse asset classes, such as stocks, bonds, and real estate. When you spread out investments, it is less probable that any one investment will suffer a huge loss. Additionally, diversification can also help to smooth out overall returns, which can make investing less volatile.

FAQs

Historical performance shows that NPS offers higher returns than PPF, but the returns are not guaranteed. PPF offers guaranteed returns, but the long-term returns have been lower than NPS.

Both PPF and NPS Tier 1 accounts enjoy protection from attachment by creditors for recovery of debts. However, Tier 2 accounts are liable and can be attached.

NPS accounts are designed to mature when you turn 60. If you withdraw before you turn 60, you are allowed to withdraw only 20% of the amount. The balance has to be converted into annuities. PPF allows partial withdrawals on completion of 7 years and full withdrawals at the end of 15 years. Therefore, PPF is the obvious choice.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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