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National Pension System v/s Public Provident Fund

Public Provident Fund has been the instrument of choice to save with a long-term horizon. It is a government-backed small savings scheme which provides fixed returns, set by the government every quarter. 

The National Pension Scheme has been gaining popularity lately. It is a government-backed market-linked pension savings scheme open to all, but mandatory for government employees, except people in the armed forces. Both are long term investment instrument and one can get optimum returns only after staying invested for a long time. However, the basic difference between both the instruments is that NPS is a retirement focussed scheme, while PPF is just a long-term savings scheme.

The NPS was introduced in 2004, exclusively for government employees, but was opened for all the sections in 2009. The NPS, which was started to promote retirement planning, has replaced the Old Pension Scheme for government employees. On the other hand, PPF was started in 1968 with an aim to mobilise small savings through an instrument that offers reasonable returns. Both schemes have their benefits and drawbacks. Here are the major differences between the saving schemes.

 

Safety

The safety of investment is of paramount importance, especially if you are saving for retirement or other important purposes. Investments in both the saving schemes are safe, but the nature of safety varies. PPF is a fixed return instrument and the returns are guaranteed by the government. The government itself utilises funds from the PPF pool which makes contributions to the scheme extremely safe.

The NPS functions differently. For starters, it is a market-linked scheme and returns follow market movements. Investors in NPS are given an option to choose from different assets and the proportion of investment in each asset. Subscribers can choose from equity, government securities, fixed return instruments and alternative investment funds. The exposure to equity is capped at 75 percent, but having substantial equity investment can pose a risk to the security of the savings. With Finserv MARKETS, the investments are tightly regulated by the PFRDA, which protects the investments from large-scale malpractices.

 

Returns

Both PPF and NPS are long-term investment options and compounding takes over when you remain invested for a long time. Nevertheless, returns vary depending on the interest rates. The interest rate for PPF account id decided by the government every quarter. It has been linked to the price movement of government bonds. For Jul-Sep, the interest rate for PPF account has been set at 7.9 percent. The interest rate generally hovers around 8 percent. To achieve the full potential of investments in PPF, you should remain invested for at least 15 years.

Returns from NPS are market-linked and the government doesn’t play any role in it. Investors have a choice to decide the asset and the proportion of investment in each asset class. Subscribers having large exposure to equity are likely to get higher returns in the long term. Equity investments are, however, capped at 75 percent. People looking for a more secure option can divert more funds towards government securities or fixed-return instruments. Equity markets are likely to fluctuate in the short term, but almost always generate decent returns in the long run. NPS returns also depend on the performance of the Pension Fund Manager. Subscribers have an option to change the pension fund manager once a year if they are not satisfied with the performance. NPS has given 8-10 percent annualised returns in around a decade.

 

Taxation

Investments in PPF and NPS come with a host of tax benefits. Contributions to PPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. PPF enjoys Exempt-Exempt-Exempt or EEE status, which means that PPF investments are tax-free at all the three stages—contribution, accumulation and withdrawal. Contributions to PPF qualify for a tax deduction, while accumulation and withdrawal of the money are exempt from taxes.

Similarly, investments in NPS also qualify for tax deduction under Section 80C. Contributors to NPS can claim an additional tax deduction of Rs 50,000 under Section 80CCD (1B) of the Income Tax Act, taking the total tax benefits to Rs 2 lakhs per year. Investments in NPS also enjoy EEE status as the contribution, accumulation and withdrawal are effectively tax-free. Only 60 percent of the accumulated corpus in NPS can be withdrawn and the balance 40 percent has to be mandatorily used to buy an annuity. Entire 60 percent of the withdrawal amount has been made tax-free, while 40 percent of the balance was already exempt from taxes. However, the regular annuities will be taxed as per the income slab of the receiver.

 

Contribution

The minimum and maximum contribution to PPF and NPS vary. A minimum of Rs 500 and a maximum of Rs 1.5 lakhs is allowed to be invested in PPF in a year. The minimum investment for an NPS account is Rs 6000, but there is no cap on the maximum investment. The maximum investment in NPS in a year should not be more than 10 percent of an individual’s annual salary or 10 percent of the gross income in case of self-employed people. Both the schemes are open to all sections of the society, however, non-resident Indians are not allowed to invest in PPF. Another difference is the age of the contributor. You can open a PPF account in your minor child's name and claim tax benefits, but the same is not allowed in NPS. To open an NPS account, you have to be between 18 and 60 years of age.

 

Withdrawal

NPS is a retirement-focussed instrument and hence premature withdrawals are discouraged. An NPS account matures at the age of 60 but can be extended for 10 additional years. Three partial withdrawals are allowed from an NPS account, but only for specific reasons such as child’s education or marriage. You cannot withdraw more than 25 percent of the corpus and the facility gets activated only after three years of investment.

Investment in PPF matures after 15 years and can be extended in blocks of five years. Partial withdrawals are allowed from a PPF account but only after five years of opening the account. The withdrawals amount is capped at 50 percent of the account balance as at the end of the financial year, preceding the current year.

Both PPF and NPS serve different purposes. NPAs and PPF enjoy almost similar tax benefits, but the returns can vary. If the aim is to save for retirement, NPS is a better option as higher exposure to equity is likely to generate higher returns and mandatory investment in an annuity ensures retirement income. With Finserv MARKETS, you can enjoy tax benefits, flexibility of choice and much more. But if you want to save for your child’s education or marriage, PPF serves the purpose better as the entire corpus can be withdrawn after maturity. 

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