PPF vs NPS: Which retirement scheme is better?

Saving for retirement is a crucial financial goal. Long-term and regular small investments are the way to go to fund your retirement. Two government-backed retirement saving schemes, the National Pension Scheme (NPS) and the Public Provident Fund (PPF), are quite popular. Both require small investments over time, however, the risk involved differs for both and so does the returns.

NPS is a government-sponsored pension program open to all employees from the public, private and unorganised sectors (except for the armed forces).

With NPS, individuals can invest regularly in a pension account through the tenure of their employment. After retirement, NPS account holders can take a certain percentage of the corpus as a lump sum and use the rest as a regular pension payment.

There are two types of NPS accounts, Tier I and Tier II accounts. The Tier I account is non-withdrawable till the age of 60 and the Tier II account is a voluntary savings account from which money can be withdrawn anytime.

PPF is another retirement savings scheme backed by the government that mainly caters to people who work in the unorganised sector or are not covered under the Employees’ Provident Fund scheme. This scheme is available in banks and post offices across the country. It is a long-term saving option that comes with a 15-year lock-in period and a guaranteed interest on the invested money.

NPS: Minimum age for investing is 18 years and maximum when one can join is 65 years.

PPF: There is no age restriction; minors along with a guardian can also invest.

NPS: Individuals must remain invested till reaching the age of 60 years. NPS accounts can be continued till the age of 70 years.

PPF: The maturity/lock in period for a PPF account is 15 years. This can be further extended in blocks of 5 years. Partial withdrawals are allowed after the 6^th year of investment (subject to bank policies).

PPF: The interest rate of PPF may change every quarter. The current PPF interest rate is 7.1 percent for the quarter ending on June 2022.

NPS: NPS investors get to choose from a mix of equities, corporate bonds, and government securities. The returns are market driven and dependent on the fund manager's performance and the asset mix that you select.

PPF: Rs 500 per year

NPS: Rs 500 per year

PPF: Rs 1.5 lakh per year

NPS: There is no maximum limit but the contribution should not exceed 10 percent of your salary or gross total income

PPF: Investment in the PPF account up gets you a tax deduction of Rs 1.5 lakh per annum under Section 80 C of the Income Tax Act, 1961. The interest on the PPF is exempt from tax and the maturity amount is also exempt from tax. Thus, PPF enjoys ‘exempt, exempt, exempt’ tax treatment.

NPS: Investment in the NPS is also tax-deductible up to Rs 1.5 lakh under Section 80 C. Such contributions can’t be more that 10 percent of your salary. An additional tax deduction of Rs 50,000 under Section 80 CCD (1B) is also available for NPS.

On maturity, 40 percent of the NPS balance can be withdrawn tax-free and 40 percent must be used to buy an annuity (a monthly income). The annuity will be taxable as per applicable rates. The rest 20 percent can be withdrawn after paying tax or be used to buy annuity.

PPF has tenure of 15 years. Partial withdrawals are allowed after the end of 6th financial year from the year of account opening (subject to bank policy)

The maximum amount that can be withdrawn from PPF accounts per financial year is the lesser of:

50 percent of the balance as at the end of the financial year, preceding the current financial year

50 percent of the balance as at the end of the fourth financial year, preceding the current year.

NPS account matures at the age of 60 and is extendible up to the age of 70. However, 25 percent of your contributions can be withdrawn after three years of opening the account under the ‘partial withdrawal’ facility. Only three such withdrawals are allowed.