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Introduction:

The National Pension Scheme (NPS) and Public Provident Fund (PPF) stand as pillars of government-backed retirement saving, each advocating disciplined savings to fortify your post-retirement years. Despite sharing similar objectives, their coexistence raises questions: why two schemes with akin goals? What sets them apart? And crucially, which one suits you better?

If you find yourself grappling with the NPS vs PPF dilemma, we’ve got you covered. Dive into this article for comprehensive insights into both schemes, empowering you to make informed decisions and optimize your investment strategy.

NPS vs PPF:

The National Pension Scheme (NPS)Established by the Government of India in 2004, serves as a voluntary retirement savings initiative accessible to all Indian citizens aged 18 to 60. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the scheme empowers subscribers to systematically contribute to their NPS accounts, with funds subsequently diversified across a range of financial instruments including equities, bonds, and government securities. Additionally, NPS provides tax incentives, entailing deductions under both Section 80C and 80CCD (1B) of the Income Tax Act.

In contrast, the Public Provident Fund (PPF) stands as a government-backed savings vehicle, featuring a stable interest rate and tailored to foster modest savings endeavors among individuals. Accessible through designated post offices, public sector banks, and authorized institutions, PPF accounts accommodate deposits of up to ₹1.5 lakhs annually, with funds locked in for a 15-year term, extendable at the subscriber’s discretion. Notably, PPF extends tax advantages, with the interest accrued enjoying complete exemption from taxation.

NPS:

The National Pension Scheme was initiated by the Government of India on January 1st, 2004, following the decision to discontinue defined-benefit pensions. The Pension Fund Regulatory and Development Authority (PFRDA) oversees all operations related to the NPS.

Under this scheme, account holders can make regular contributions to retirement accounts throughout their careers. When they retire, they have the right to withdraw part of the corpus as cash at once and use the rest as pension funds.

Who Is Eligible to Invest in NPS: 

NPS, conversely, serves as a market-linked retirement savings scheme delivering potentially higher returns compared to PPF, albeit with increased risk. The returns on NPS investments are variable, contingent upon the performance of underlying assets. With a lock-in period until the age of 60, NPS permits partial withdrawals after a specified duration. Indian citizens aged 18 to 70, along with NRIs meeting specific criteria, are eligible to open NPS accounts.

PPF:

• PPF is an age-old government-sponsored financial scheme popular with investors who have a long-term investment horizon. Keep investing in the plan for 15 years for the best results!
• Earlier, early closure of PPF accounts was not allowed; However, this provision now applies, with the condition that the account remains active for at least 5 years prior to closing.
• Premature closure will only be permitted under specific circumstances, such as:
• For medical expenses relating to life-threatening diseases, supported by documentation from a medical practitioner.
• The account holder’s residency status may be updated upon submission of a copy of their Passport and visa, or their Income-tax return.
• The prevailing interest rate for PPF stands at approximately 7.1% per annum, with interest compounded annually.
• To maximize interest rates, it is best to deposit money between the 1st and 5th of each month, as the interest rate is calculated based on the minimum amount deposited during this period (i.e. cash). remaining on day 5).
• You can avail of a loan against your PPF account after one year from the year of deposit. If you repay the loan in full, you may become eligible for another loan as well.

Who Is Eligible to Invest in PPF:

PPF, a government-backed savings scheme, offers a fixed rate of return currently at 7.1% per annum. With a lock-in period of 15 years, extendable in 5-year blocks, PPF accounts cater to Indian citizens, including minors, and can be held by individuals and Hindu Undivided Families (HUFs).

Differences between NPS vs PPF:

PPF	NPS
Any Indian resident can open a PPF account, and they also have the right to open an account in the name of minor children and enjoy tax benefits	Citizens of India aged 18 years and above can have an NPS account, but not more than 70 years.
A PPF account matures in 15 years, and individuals have the flexibility to extend this term by blocks of five years, with or without making additional contributions, after the initial 15-year period.	The maturity tenure is flexible. Contributions to the NPS account can continue until the age of 60 years, with the option to extend investments up to the age of 70 years.
NRIs not eligible for this scheme	NRIs eligible for this scheme
All deposits made in the PPF are eligible for deduction under Section 80C, capped at Rs. 1,50,000. Additionally, both the accumulated amount and interest are tax-exempt upon withdrawal.	Tax benefits are applicable only to Rs. 1.5 lakh under Section 80CCD(1) of the Income Tax Act, with an additional Rs. 50,000 under Section 80CCD(2), totaling up to Rs. 2 lakh.
Partial withdrawals are permitted from the 5th year onward with certain limitations, while loans against PPF can be availed after the completion of the first year from the year of deposit.	After 10 years, account holders are eligible for early partial withdrawals under certain circumstances. However, in case of early exit, at least 80% of the accumulated corpus should be used to purchase life insurance annuities.
Interest Rates are Around 7-8%	Interest Rates are Around 9-12%

Comparison of NPS vs PPF:

• Although NPS is market-linked and involves some risk, it is effectively regulated by the PFRDA, reducing the possibility of misconduct. On the other hand, PPF offers benefits that are fully backed by the government, providing almost risk-free investment.
• NPS offers slightly higher liquidity due to its provision for multiple opportunities of partial withdrawal. Conversely, PPF allows partial withdrawals after a specific lock-in period, subject to an amount cap.
• Withdrawals from NPS balances as they mature are tax-free, whereas annuities have to be purchased after taxes are paid. PPF falls under the EEE or exemption-exempt category.
• NPS can yield returns of up to 10% in certain cases, while PPF offers relatively lower but stable returns, typically ranging between 7-8%.

Disadvantages of the NPS vs PPF:

PPF:

• Though PPF is considered a safe investment, its returns are relatively low compared to alternatives like equity mutual funds.
• The fixed interest rate on PPF implies that the returns may not outpace inflation.
• The 15-year investment period in PPF makes it easy to combine with other financial options.

NPS:

• The lock-in period of NPS extends until the age of 60, rendering it less liquid when compared to other investment alternatives.
• While contributions to the NPS are tax deductible, withdrawals are taxable as they come due, ultimately reducing the overall return.
• The investment choices in NPS are comparatively restricted in comparison to other options like mutual funds.

Conclusion:

NPS and PPF are widely regarded as top choices for building a retirement corpus. Each investment option boasts its own distinct advantages, drawbacks, and features, therefore the selection should align with individual requirements.