National Pension System (NPS) Vs Public Provident Fund (PPF)
The National Pension System (NPS) scheme is launched by the Government of India and is regulated by Pension Fund Regulatory and Development Authority (PFRDA). It is specifically designed to facilitate the financial requirements of people after retirement. It was launched in January 2004 initially for the government employees and later on, in the year 2009, the scheme was made open for a wider section of the population. The scheme lets the subscribers make monthly investments into a pension account while working. After retiring, the people subscribed to the scheme are able to withdraw a portion from the corpus as lump sum withdrawal and use the rest of the corpus for buying an annuity to receive a regular income from the annuity scheme purchased.
Any Indian citizen over the age of 18 years is eligible for this scheme and the person has to conform with KYC (Know Your Customer) standards. NRIs are also eligible to subscribe to this scheme. A person cannot open more than one account under this scheme. National Pension System (NPS) Scheme which is regulated or administered by the Pension Fund Regulatory and Development Authority (PFRDA) also allows investors who have subscribed to the scheme an early exit option from the scheme before retiring or choose superannuation.
Some features of the NPS scheme are:
The scheme gives the flexibility of choosing by offering two choices for investing, i.e., auto choice and active choice. Auto choice is a default option for the account holder(s). Under this option, fund investments are managed by an appointed manager as per the account holder’s age profile. On the other hand, the individual has an option to decide among the available asset classes in which to invest. They can allocate varying percentages of contributed funds in different asset classes like equity, corporate bonds, government bonds & AIFs. The maximum allocation to equities has been capped at 75% up to the age of 50 years. After that the equity portion begins to reduce systematically.
The investors also have an option to switch their fund managers if they are not satisfied with the performance.
The NPS scheme offers the investors two types of accounts i.e Tier-1 account & Tier 2 account.
Tier-1 Account has a lock-in till the retirement of individuals i.e withdrawals are not allowed before the retirement. And in Tier-2 Account, the individuals can make withdrawals at any time as per the needs & requirements. So, the Tier-2 account provides high liquidity.
3. Partial Withdrawals
Premature withdrawals(anytime before the retirement) from this account are allowed but subject to some conditions that are:
- Withdrawals can only be made for meeting some specified financial requirements like for child’s education, buying a house, or for meeting medical needs.
- Premature withdrawals are allowed only up to the extent of 25% of the total corpus is allowed after the 3 years of opening the account.
- Also, withdrawals can be made for a maximum of 3 times that too each one after the gap of 5 years.
4. Tax Benefits
The tier 1 account investments in NPS scheme comes under the EEE category i.e Exempt-Exempt-Exempt in terms of taxability. By EEE or Exempt-Exempt-Exempt category, there are three types of exemptions in taxes. First Exempt means the investment is qualified for deduction and a portion of annual income which is equal to investment amount is not taxable. Second Exempt means interest which is earned on investment is exempted. Third Exempt means the amount generated from investment is not taxed at the time of withdrawal. Tier 2 account permits claiming tax deductions just by government employees on making at most of the venture of Rs.1.5 lakh with a lock-in term of 3 years under Section 80c of Income Tax Act,1961. As the investments or contributions in the National Pension System are eligible for claiming tax deductions by the individuals under the sections 80CCD, 80CCD(1B) & 80CCD(2) of the Income Tax Act.
On the other hand, Public Provident Fund (PPF) is a prevalent scheme in the country. Public Provident Fund is a long-term investment. This scheme produces a stable flow of income through guaranteed returns. The minimum amount for investments in a PPF account is Rs. 500 and the maximum is Rs 1.5 Lakhs in a financial year. An account can be opened on the behalf of a minor as well. PPF is launched by the Government of India and therefore involves very low risk. PPF provides benefits of tax exemption. PPF also provides some level of liquidity.
Some features of PPF are mentioned below:
1. Tenure of investment
Public Provident Fund is a long-term investment of around 15 years. There is also an option to extend the tenure by 5 years after the termination of the lock-in term.
2. Loan Facility
This scheme offers the benefit to avail loans against investment. Loan can only be granted from the third year till the end of the sixth year from the time of account activation. It is important to note that the maximum amount that can be claimed for the purpose is 25% of the total account balance. And the maximum term of loans against PPF is 36 months.
3. Criteria of Eligibility
Indian citizens over the age of 18 years are able to open PPF accounts and minors are also eligible to open accounts under this scheme, but the account has to be operated by a guardian or a parent. NRIs and HUFs are not allowed to open an account under this scheme.
4. Tax Benefits
All deposits made under this scheme are tax-deductible under Section 80C of Income Tax Act, 1961. During the time of withdrawal, the amount accumulated along with interest is also exempted from tax.
5. Nomination Facility
Accountholder under this scheme is able to assign a nominee for his account during the time of opening the account or later.
6. No Risks Involved
This scheme involves no risks in terms of the safety of capital as well as the interest because of the sovereign guarantee by the Government of India.
Comparison of NPS and PPF
After knowing about both the schemes, it is important to compare these schemes in different areas and realize the differences between them.
1. Risks Involved
The National Pension System (NPS) account carries risks on investments. The amount of risks varies across the investment options & asset classes chosen for investments. For example- The higher allocation of the portfolio in equities will carry higher risks whereas the higher allocations of the portfolio in government bonds or corporate bonds will carry lower risks.
On the other hand, the amount of investment & the interest from the PPF account are backed by the sovereign guarantee of the government so carries almost no risk involved.
The Public Provident Fund has a fixed rate of interest which is set quarterly by the Ministry of Finance. Currently, the PPF account offers an interest rate of 7.10% p.a.
The returns from the NPS account varies across the investment options & asset classes selected for allocations. However, returns from the NPS Account are generally higher than those of the PPF Account.
Investing in PPF accounts for maximum Rs 1.5 Lakh per annum provides tax deduction under Section 80C of the Income Tax Act, 1961. PPF also enjoys benefits of tax exemption. Investment of NPS for maximum Rs 1.5 Lakh per annum provides tax deduction under Section 80C of the Income Tax Act, 1961. The returns from the scheme are also exempted from taxes. NPS also enjoys additional tax deduction under Section 80 CCD (1B). Post maturity, the withdrawal amount as well as the returns earned are also exempted from taxes.
The Public Provident Fund (PPF) allows the partial withdrawal facility after the 5 years of opening the account. The National Pension System (NPS) scheme allows maximum three partial withdrawals during the whole tenure for emergencies under particular policies. The withdrawals can be made after the completion of 3 years from the date of opening the account.
One can also avail loan against the balance in the PPF account. Loan can also be availed against PPF account from third year to the end of sixth year and the maximum amount that can be availed is 25% of the balance in PPF account.
NPS is specifically designed to help citizens to meet their financial requirements after retirement whereas PPF is not designed especially to solely cater financial requirements of citizens after retirement. While this may be the reason for some citizens to invest into PPF, there are also many different requirements of different individuals such as child’s future savings, marriage savings, emergency funds, etc. PPF accounts can also be opened for minors which will mature in their adulthood and could help in meeting the child's financial requirements for education purposes. NPS account gets matured only when the account holder reaches the age of 60 years, which can also get extended till the age of 70 years.
|Lock-in Period||Till Retirement||15 years|
|Tax benefit||Can be claimed upto Rs 1,50,000 in a financial year under section 80C of Income Tax Act, 1961 and also recieves additional tax deduction under Section 80 CCD (1B).||Can be claimed upto Rs 1,50,000 in a financial year under section 80C of Income Tax Act, 1961. Interest also exempted from taxes.|
|Premature/ Partial Withdrawal||The National Pension System (NPS) scheme allows three partial withdrawals for emergencies under particular policies.||The Public Provident Fund (PPF) allows the partial withdrawal facility after the completion of 5 years.|
|Loan facility||Loan cannot be availed.||Loan can be availed against PPF account from third year to the end of sixth year of up to 25% of the balance in PPF account.|
|Maximum investment||Not set||Rs 1,50,000 in a financial year.|