PPF (Public Provident Fund) and NPS (National Pension System) are the two most popular retirement schemes. Both of these have their benefits. However, knowing the difference between these two products may help you to make a final decision for investing. Therefore, let’s take a look at PPF vs NPS Investment: Which is better NPS or PPF?
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NPS or PPF which is better?
Public Provident Fund is solely a debt-oriented and government-guaranteed savings scheme. The National Pension Scheme, on the other hand, is a market-linked savings vehicle consisting of both debt and equity. However, both of these two tools (NPS and PPF) are specially meant for retirement fund accumulation.
NPS vs PPF which is better? This is the question that we will answer in this blog post. Here are the highlights of PPF vs NPS to help you to choose the right plan for retirement savings.
Public Provident Fund (PPF)
The Public Provident Fund scheme was introduced by the government in the year 1968. The main objective of this product was to mobilize small savings in the form of investment. This is a long-term investment option that comes with a 15 years lock-in period.
PPF scheme is one of the popular and long-term investment schemes in India. This is backed by the government and offers risk-free returns with an attractive interest rate. The scheme also provides income tax benefits.
This scheme offers guaranteed returns as well as complete capital protection. Therefore, this is a safe investment option to save taxes.
At present, the interest rate on PPF is 7.1 percent. The interest rate is compounded annually on investments and paid on maturity.
Who can invest in PPF?
Any Indian citizen, 18 years or above can invest in this scheme. Parents can open an account (another) in the name of a minor child. NRIs and HUFs cannot open a PPF account.
National Pension System (NPS)
The National Pension System is a market-linked voluntary contribution-based retirement savings scheme. The NPS scheme was started by the Government of India on 1st January 2004. PFRDA (Pension Fund Regulatory and Development Authority) manages every operation about the National Pension Scheme.
The main thought behind this product was to extend financial security post-retirement to all who opt out for this scheme. In this scheme, you can save systematically during your working years for your old-age pension.
This scheme seeks to inculcate the habit of saving for retirement years. It is a market-connected product as the contributions are invested in a mix of assets.
You can choose between two types of accounts under the NPS scheme.
1. Tier I
The Tier I account is the primary account. It is a non-withdrawable retirement account till the age of 60; except for in specific situations. Investors are provided with PRAN (Permanent Retirement Account Number).
2. Tier II
It is a voluntary savings account. You can withdraw your money whenever you want. A Tier-II account is an investment account like a mutual fund.
Who can invest in NPS?
Any Indian national between the age of 18 and 65 years is eligible to join it. NRIs (Non-resident Indians) are also eligible to join this scheme.
Similarities and Difference between PPF and NPS
National Pension scheme and Public Provident Fund both are retirement-saving schemes. Therefore, there are certain similarities between the two schemes. Let’s look at them in the below table:
| Similarities Between NPS and PPF | |
| S. No. | Features |
| 1 | PPF and NPS both are retirement saving products |
| 2 | You need to open an account for investing |
| 3 | Certain tax benefits are available in both the plans |
| 4 | Both have a long-term lock-in period |
| 5 | There is no tax on returns |
| 6 | Also, there is no tax on the final corpus |
Difference between NPS and PPF
Following are some points highlighting the difference between PPF and NPS:
| Difference between NPS and PPF | ||
| Particulars | NPS | PPF |
| Returns | Linked to the market (usually 9% to 12%) | Floating Rate, 7.1% (w.e.f. 1st April 2020) |
| Safety | Well regulated but generate market-linked returns | Backed by Indian Government |
| Who can invest | Any Indian national between the age of 18 and 65 years | Anyone except NRIs and HUFs |
| Minimum Investment Amount | Rs.1,000 for Tier I and Rs.250 for Tier II/nil | Rs.500 per year |
| Maximum Investment Amount | For Salaried: No limit, For Self-employed: Up to 20% of Gross Total Annual Income | Rs.1.5 lakh per year |
| Investment Period | Till 60 years of age | 15 years |
| Extension Allowed | Till 70 years of age | For a block of 5 years |
| Tax Benefits | Up to Rs.2 lakh per year | All deposits made in the PPF |
| Premature withdrawal | After completion of 10 years for Tier I | 7th year onwards |
Is NPS better than PPF?
Is NPS better than PPF? This is the question that we will try to find answer in this section.
As per a simple calculation, if someone invests Rs.1000 in PPF and Rs.1000 in NPS. He/she would get a 7.1% interest rate in PPF while in NPS he/she would get 9-12% (usually) returns which is higher than the PPF.
Therefore, let’s illustrate with the help of the PPF vs NPS calculator available freely on the internet.
PPF vs NPS Calculator
PPF Calculator
Let’s assume, Ram invests Rs.1.5 lakh per annum in Public Provident Fund. And if the interest rate remains at the current 7.1% then the SBI PPF calculator shows that the maturity amount after 15 years will be Rs.40,68,209.
Image source: groww.in
NPS Calculator
Let’s assume, Shyam (45 Years old) invests Rs.12,500 per month in NPS Scheme. And if the returns in NPS remain at 10% (Usually 9-12%) then the NPS calculator shows that the total corpus after 15 years (at the age of 60 years) will be Rs.52,24,054. However, the money allowed for withdrawal will be Rs.31,34,432 while the rest of Rs.20,89,622 will be used for buying an annuity (keeping annuity at 40%). And it will fetch a monthly pension of around Rs.10,448.
Image source: http://www.npstrust.org.in
NPS vs PPF Calculator – Retirement Corpus
| National Pension Scheme vs PPF | ||
| Ram | Shyam | |
| Invested in | PPF | NPS |
| Annual Returns (Average) | 7% | 10% (Usually 9-12%) |
| Amount Invested Per Annum | Rs.1.5 lakh | Rs.1.5 lakh |
| Investment Period | 15 years | 15 years |
| Total Investment in 15 years | Rs.22,50,000 | Rs.22,50,000 |
| Retirement Corpus | Rs.40,68,209 | Rs.52,24,054 |
The reason for the difference in the retirement corpus is the power of compounding. In the last few years, the interest rate for PPF has been decreasing. On the other hand, National Pension Scheme can give you more than 10% returns. In other words, one would get more money at the time of retirement by investing in NPS Scheme.
Final Thoughts (PPF vs NPS)
Both the retirement saving schemes (PPF vs NPS) have their benefits. As you can see, by opting NPS scheme, you can get more money at the time of retirement. However, it may not be a good scheme for you if your investment goal is like children’s education, their marriage, etc. Therefore, you must ensure that you know the features of these two schemes before investing.
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