Let’s take a look at the difference between PPF and NPS

By Medha Roy Chowdhury | September 25, 2019

Confused between NPS and PPF? Read on to find out which is the better scheme to suit your needs.

Are you new to investing? We understand that investing wisely can be quite a challenge. If you’re a novice at investing, don’t worry! We’re here to tell you the difference between the National Pension Scheme (NPS) and the Public Provident Fund (PPF).

Both NPS and PPF are two investment vehicles sponsored by the Government of India, designed to help you build your nest egg. The question is, which scheme should you pick? To find out, let’s start by understanding the features of both.

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  • What is NPS?

NPS is a government-sponsored retirement and investment tool. It is a contribution scheme that comes with a spectrum of investment options. When launched in January 2004, it was exclusively meant for government employees. In 2009, the scheme was made accessible to all individuals of the country. Now, any Indian citizen of 18-60 years of age is eligible for opening an NPS account.

The advantage of NPS lies in the fact that account holders can continue enjoying a stable income even after retirement, in addition to sizeable returns on the invested sum.

After opening an NPS account, you can keep contributing a minimum of Rs. 6,000 every year, till you retire. After retirement, you can withdraw about 60% of the sum for fulfilling a financial commitment. The remaining 40% of the total invested sum should be directed at purchasing an annuity and securing a regular post-retirement income.

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  • What is PPF?

Introduced by the Government of India, PF is a long-term investment scheme. It is a risk-free scheme as the returns on invested sum are completely tax exempted. You can invest a maximum amount of Rs 1.5 lakh in your PPF account in a financial year. This investment can be made in the form of a lump sum or in 12 monthly contributions.

The lock-in period for a PPF account is 15 years. PPF is an efficient tax-saving investment, offering tax deduction under Section 80C. Moreover, there’s no tax on the interest earned, and the maturity amount is tax-free too.

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  • Which is better-NPS or PPF?

Now that we are aware about the features and benefits of the NPS and PPF schemes, let’s explore which is better as an investment tool.

In case of PPF, there is no prescribed use of the maturity amount. As a PPF account holder, you can choose what to do with the maturity amount, whether you invest the sum in stocks or deposit it in a Savings Account. You can also use it as cash. On the other hand, it is mandatory that 40% of your NPS amount be used for annuity purchasing. This is one of the basic differences between the two schemes.

However, when the returns from both schemes are compared, NPS is seen to fetch higher returns because a considerable portion of the money is directed towards annuities. This leads to higher returns based on the market valuation. In PPF, on the other hand, returns are fixed.

While both NPS and PPF are effective investment vehicles, NPS clearly emerges as the better option due to the two-fold benefits of safety of capital and assured returns on invested sum. Moreover, in terms of battling inflation, NPS returns are expected to be higher than that of PPF, thereby making it the better choice of the two. In addition, NPS has a shorter lock in period when compared with PPF.

Now that you are aware of the benefits of both, choose a scheme depending on which is well-suited for your financial portfolio.

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Category: Investments UCN
Medha Roy Chowdhury

About Medha Roy Chowdhury

Square peg in a round hole, Medha reads whenever she gets the chance to. She is happiest when travelling and dreads having to choose between the hills and the sea. Dog lover at heart, she is in pursuit of adopting a few canine friends someday. Weird as it may be, she bakes when stressed. Previously a Market Research Editor by profession, she takes a keen interest in finance. When she is not reading, you’re sure to find her with her ukulele.

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