National Pension System vs. Public Provident Fund

By BankBazaar | June 3, 2016

What-are-the-differences-between-NPS--vs.-PPF

Visual Credits: Sheetal Patil

This is your one-stop guide to understanding the National Pension System(NPS) and Public Provident Fund(PPF). We’ll help you compare the features of both these investment options and make it easier for you to choose the best one that is suitable for you.

Who can invest?

  • All individuals who are citizens of India are eligible to invest in the National Pension System and the Public Provident Fund.

Is there an age limit?

  • You want to invest in the National Pension System? You need to be between 18-60 years of age.
  • There is no age limit for investors in the Public Provident Fund.

Investment objective

  • The National Pension System is generally an investment option that is ideal for retirement planning. As the retirement age is generally 60 years, if an investor aged around 30-40 years begins to invest in the National Pension System, the investment tenure would be 20-30 years, until the investor reaches the age of 60 years.
  • The Public Provident Fund is only a long-term investment. A PPF account has a lock-in period of 15 years.

Fund manager  

  • Investments in the National Pension System are managed by one of the pension fund managers who are approved by the Government of India. Here is a list of the fund managers.
  • Public Provident Fund accounts are managed by the Central Government.

Returns

  • The National Pension System does not give investors a fixed rate of return. You have to allocate your investment amount between equities, government securities and debt securities.
  • In the National Pension System, payouts are not made on a yearly basis. Returns are consolidated and the value of your investment increases gradually over time.
  • With the Public Provident Fund, the interest is paid out at the end of every financial year. There is a fixed rate of interest that is determined at the start of every financial year.
  • What is the interest rate for the PPF in FY’16? The rate of interest is 8.7%.    

Minimum investment

  • For the National Pension System, a minimum investment of Rs. 1,000 per year is required, to keep your account active.
  • For Public Provident Fund accounts, a minimum investment of Rs. 500 per year is required.

Lock-in period

  • The National Pension System has a lock-in period up to the investor’s age of 60 years.
  • The Public Provident Fund scheme has a lock-in period of 15 years.

Tax benefits

  • Investments made in the National Pension System up to a maximum amount of Rs. 2 lakh per year are deductible from your taxable income.
  • You can get tax deductions on the Public Provident Fund for investments up to Rs. 1,50,000 per year.

Which components of the investment are taxed? Which are not taxed?

  • With the National Pension System, you get tax benefits on the capital appreciation of your investment. There are no tax benefits on the principal amount that you get on withdrawal or maturity.
  • In the Public Provident Fund, the yearly interest earned is not taxed. Even the principal withdrawn or received on maturity is exempted from tax.

What happens on maturity?

  • On maturity, under the National Pension System 60% of the Net Asset Value (NAV) of your investment is paid to the investor. This includes the principal and return earned. The remaining 40% has to compulsorily be reinvested in an annuity scheme offered by any Life Insurance company. The investor then receives a monthly payment as pension.
  • In the Public Provident Fund, your entire investment is paid back to you, including the interest earned.

Premature withdrawals and exit

  • Under the National Pension System, you are permitted to exit the scheme prematurely and stop any further contributions. You will get paid back only 20% of the current NAV of your investment, while the remaining 80% is to be reinvested in an annuity scheme.
  • The Public Provident Fund permits premature withdrawals. You cannot however exit from the fund completely. Beginning from Year 7 of your investment, you are allowed one withdrawal per year. You can withdraw not more than 50% of the PPF account balance at the end of Year 4 preceding the year of withdrawal. For example, if you opened your PPF account in 2001, you will be allowed to make a partial withdrawal in 2008. Your withdrawal amount should be not more than 50% of the total value of the investment on the year 2004 (i.e. the 4th year) It’s simple, isn’t it?

Additional Reading:  Guide to Income Tax Exemptions for the Financial Year 2016-17

Now that we’ve given you a handy comparison of the features of the National Pension System and the Public Provident Fund, go ahead and choose your investments wisely.

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Category: Provident Fund Tax benefits

About Dheeraj Kapoor

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2 thoughts on “National Pension System vs. Public Provident Fund

  1. Deepesh

    Nice post. For NPS, minimum investment per year has been reduced to Rs 1,000

    Reply
    1. Team BankBazaar

      Hi Deepesh,

      Thank you. The article has been updated.

      Cheers,
      Team BankBazaar

      Reply

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