NPS vs PPF: Which is Better for Retirement with Tax Saving?

Everybody wants to retire, but nobody wants to plan for it properly.

Right?

Most people’s strategy of retirement planning is ‘Hope’. And you would agree too that hope, isn’t the best of strategies.

Not surprisingly, whenever we talk about retirement savings in India, the EPF (Employee Provident Fund or simply called as PF) and PPF (Public Provident Fund) are offered as the most popular instruments. However, over the past few years, even NPS (National Pension System) is gaining subscribers.

So how do these compare – EPF vs NPS vs PPF?

To be honest, EPF is something that happens to people without choice. They take up a job and the employer deducts a part of the salary to put in EPF. There aren’t any choices there. If you are working in a company that deducts EPF, you will automatically have EPF in your investment (retirement) portfolio. And assuming you don’t withdraw from it unnecessarily and at job switches, EPF can no doubt be used an accumulator of solid retirement corpus.

With that, let’s leave EPF aside. Instead, the question arises between the National Pension System (NPS) and Public Provident Fund (PPF).

Both are voluntary (unlike EPF). So you have a say in whether you want to opt for either or both of them for savings.

And no doubt, both have their own benefits and shortcomings. So if you want to choose between NPS and PPF, then knowing the main differences between PPF Vs NPS will surely help. Or maybe, it might make sense for you to go for both PPF and NPS if it comes to that. But we will discuss that later.

So before we decide National Pension Scheme (NPS) Or Public Provident Fund (PPF) and which one (or both) to pick, let’s first see the differences between these popular retirement and tax-saving options.

If I were to briefly compare it first, then PPF (Public Provident Fund) is a pure debt product which is backed by the government. It is used mainly to accumulate a corpus over the long term. On the other hand, NPS is a hybrid retirement product (has equity and debt) designed to provide a pension in your retirement years. That is the first major difference between the two.

Now let’s check the other major differences.

NPS vs PPF: Aspect of Safety

PPF is a fixed, guaranteed return pure-debt product backed by the government. So for all practical purposes, it is risk-free.

NPS, on the other hand, doesn’t provide any fixed or guaranteed returns. It invests your money in a chosen ratio of equity and debt (both government and corporate) and hence, the returns are market-dependent. So the NPS returns you get depend on the performance of the Pension Fund Managers and the overall returns of NPS investment portfolio and schemes.

NPS vs PPF: Returns Comparison

This is important. After all, in both NPS and PPF, you as an investor are concerned about returns you get on your retirement portfolio.

The PPF is a fixed-income debt-oriented investment product. That is, PPF has a fixed rate of return (%). And the exact interest rate of PPF is set every quarter. In recent years, the PPF returns have been around 8% per annum. But you can have a look at the detailed history of PPF Interest rates.

Here is a history of PPF returns in the last few years:

The NPS allows investors to have an equity exposure of up to 75% in certain cases (though actual equity exposure depends on your NPS Auto Vs Active choice). But given the option of having a large equity exposure, NPS subscribers have a chance at getting potentially higher returns.

The NPS returns depend on the performance of NPS funds. And more specifically on the asset allocation chosen and the actual performance of the Scheme E (NPS Equity Funds), Scheme G (NPS Government Bond Funds) and Scheme C (NPS Corporate Bond Funds) of NPS.

The table below will give you the performance of various NPS schemes in last 1, 3 and 5 years across various Pension Fund Managers:

So if you were to ask what or who decides the returns? Then for PPF, the interest rate is decided by the government while for NPS, returns are linked to the market and if an aggressive allocation is opted for, then potential returns can be higher.

NPS vs PPF: Tax Benefits while investing

There we have it. The tax benefits of NPS. And the tax benefits of PPF.

Many people were waiting to hear just that. 🙂

These people are concerned only with saving as much as taxes and not with achieving their financial goals (why this is wrong?). And it’s a case of can’t see the forest for the trees.

PPF gets tax benefits of up to Rs 1.5 lac under Section 80C of the Income Tax Act. But as you know, there are many options for you to use for tax benefits under Section 80C (like insurance premiums, EPF and VPF contributions, home loan principal repayment, etc.)

NPS also gives you tax benefits. Your investments in NPS are eligible for deductions up to Rs 1.5 lacs under Section 80CCD(1) of the Income Tax Act. And this benefit under Section 80CCD(1) is a part of Section 80C of the Income Tax Act.

But there is something else. NPS subscribers also get exclusive extra tax benefit of Rs 50,000 under Section 80CCD(1B).

So in a way, the total tax benefit available for your contributions to NPS is Rs 2 lac.

And if your employer also takes the NPS route, then you can get even more tax benefits for your employer’s NPS contributions (though with some limits). You can read more about the latest NPS Taxation Rules too if you wish to deep dive in NPS taxations.

The was about PPF and NPS Tax benefits at the time of investing. Shortly we will also see how the taxation on maturity differs for both NPS and PPF. But before that, let’s understand PPF and NPS Exit/Maturity Rules.

NPS vs PPF: Exit Rules at Maturity

PPF has a tenure of 15 years. At maturity, that is after 15 years, the full PPF maturity amount is tax-free in your hands. You can also choose not to withdraw money from PPF and instead extend by 5 years. There is no limit on the number of extensions. So your PPF account can be extended beyond its original tenure of 15 years to 20 years, 25 year or even 30 years.

If you want to know how much you can save using PPF, feel free to use this PPF Excel Calculator (Free Download). Or if it interests you, then you can even have a look at how to become crorepati using PPF.

The latest NPS Exit Rules state that at maturity (i.e. at 60 or retirement) of NPS, you have to use at least 40% of the accumulated NPS corpus (Tier 1) to purchase an annuity plan. The remaining amount of up to 60% can be taken out as a one-time lump sum. And neither the 40% used for annuity purchase is taxed nor 60% lump sum is taxed. Only the annuity pension income is taxed in later years.

Also important to note is that NPS matures at the age of 60 but you can extend it till the age of 70.

But if you do not wait till 60 and decide to exit NPS before (like in case of voluntary retirement or early retirement), then minimum 80% of the accumulated NPS corpus has to be compulsorily used for the purchase of an annuity. Only the remaining 20% or less can be withdrawn tax-free as a lump sum.

So if we were to summarize about PPF and NPS tenures, then a PPF account matures in 15 years. One can even extend this term after 15 years by blocks of 5 years with or without making further contributions. As for NPS, the maturity tenure isn’t exactly fixed. You can contribute to the NPS account till the age of 60 years with an option to extend the investment to the age of 70 years.

NPS vs PPF: Taxation At Maturity (Exit)

Normal exit in case of PPF is considered after 15 years of account opening. Normal exit in case of NPS is considered at the age of 60 (or superannuation). So the actual tenure of NPS will vary depending on when the NPS account was opened. So if someone opens it at age 32, then normal NPS maturity happens after 28 years. But if someone opens an NPS account at age 47, then normal maturity happens after 13 years.

After the 15-year tenure, the PPF maturity amount is 100% tax-free in your hands. If you extend it by 5 or more years, even then the maturity amount is tax-free in your hands as per current PPF maturity taxation rules.

What about NPS Taxation at Maturity or Exit (Retirement)?

• As per the latest NPS Exit Rules, at least 40% of the accumulated NPS corpus is to be utilized for the purchase of an annuity at retirement. And the remaining 60% can be withdrawn as a lump sum.
• The amount used to purchase an annuity (minimum 40% but more can be used) is fully exempt from taxes. However, the annuity income (or pension) coming from the annuity plan will be taxed as per tax slab in the year of receipt.
• The remaining 60% corpus (or less if more than 40% used for annuity purchase) is also exempt from any taxes.

NPS vs PPF: Pre-mature partial Withdrawal before Maturity/Exit

Both PPF and NPS are long-term savings instruments. And more or less, used often for retirement savings. So it makes sense to make them illiquid and hard to withdraw money from. Else, the purpose of these retirement savings products would be defeated if you kept dipping in PPF or NPS for other needs. Right?

The PPF allows limited withdrawals before maturity as per below rules:

• From 7th year onwards, PPF account holders are allowed to make partial withdrawals.
• The maximum amount that can be withdrawn per financial year is the lower of the following: i) 50% of the PPF account balance at the end of the financial year preceding the current year, or ii) 50% of PPF balance at the end of the 4th financial year preceding the current year.

You can also get a loan against your PPF account. The PPF loan amount is available from the 3rd to the 6th year after account opening. And the maximum loan amount against PPF is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for.

Like in PPF, even the NPS premature withdrawal is different from exiting NPS completely. The NPS withdrawal rules are for cases when the NPS account isn’t closed and only partial withdrawals are made. These rules are applicable to Partial withdrawal from NPS Tier-1 accounts:

• Partial withdrawals can only be made from NPS if the Subscriber has had an active NPS account for atleast 3 years.
• There is a limit on the amount of money that can be partially withdrawn from Tier-I NPS. The limit of withdrawal is up to 25% of only the subscriber’s own contribution (excluding employer’s contribution). Therefore, if both you and your employer are jointly contributing to your NPS account, then the maximum amount that can be withdrawn from your account will be calculated on the basis of the contributions made by you only and exclude your employer’s contributions.
• The withdrawal can only be made for the clearly-defined expenses like Children’s Higher Education, Children’s Marriage, Construction / Purchase of First House, Treatment of 13 critical illnesses for self, spouse, children and dependent parents and to start a new business venture. And No partial withdrawal will be allowed from the NPS account in any other situations.
• As for the Tier 2 NPS account, there is no such limit or conditions attached on partial withdrawal from it. But the government employees who are claiming deduction under section 80C of the Income Tax Act on the Tier-II account contributions cannot withdraw from NPS Tier-II account before 3 years if they have claimed the deduction for tax benefits.
• There are limits to how many times you can withdraw from NPS. The partial withdrawal can happen a maximum of only 3 times during the entire tenure of NPS subscription. No further partial withdrawals will be allowed, once the individual has made three withdrawals. And these withdrawals are exempted from taxes.

You can read more about NPS Tier 1 and Tier 2 Account Withdrawal Rules.

By the way, if you are confused or want to know more about what are the two types of NPS accounts, then make sure you read this detailed note on Difference between NPS Tier 1 Vs NPS Tier 2 Account. It will give you all there is to know about the 2 types of NPS accounts and when you should consider opening the Tier 2 account (the Tier 1 NPS account is mandatory to open for NPS subscribers)

NPS vs PPF: Annuity Purchase

Both NPS and PPF are retirement-focused products. To be fair NPS is pure retirement product while the PPF can be used to save for retirement as well as for other financial goals (Free Excel Goal Sheet to find yours) which have similar timelines.

But there is no compulsion to purchase an annuity on the maturity of PPF. You get your full PPF accumulate corpus tax-free and you are free to use it without restrictions.

In NPS though, you have to use a minimum 40%of the accumulated amount to purchase an annuity plan. And if you exit before retirement at 60, then you will necessarily have to use at least 80% of NPS corpus to purchase an annuity plan.

NPS vs PPF: Maximum & Minimum Investment in a Year

This is an interesting discussion if you are looking to save more than Rs 1.5 lac towards your retirement savings.

You can only invest up to Rs 1.5 lac in PPF in a financial year. Not more. And if you have multiple PPF accounts in family, then ideally speaking, this limit of Rs 1.5 lac is on all the account combined. And you can make any number of contributions in a year (earlier before 2020, a maximum of only 12 contributions per year in PPF account were allowed).

What about NPS? There is no upper limit on the investment you can make in NPS every year. And this is what makes NPS useful for people looking to invest bigger amounts for retirement.

On the lower end, PPF requires a minimum of Rs 500 annually.

Whereas for NPS, the minimum rules are as follows:

• NPS Tier 1 – Minimum amount per contribution – Rs 500
• NPS Tier 1 – Minimum contribution per Financial Year – Rs 1000
• NPS Tier 1 – Minimum number of contribution per Financial Year – One
• NPS Tier 2 – Minimum amount per contribution – Rs 250
• NPS Tier 2 – Minimum contribution per Financial Year – Nil
• NPS Tier 2 – Minimum number of contribution per Financial Year – Nil (Not applicable)

NPS vs PPF: Choice of Where The Portfolio is Invested?

PPF is a pure debt product. So you have no choice there. Your money gets invested in debt and you earn what government gives you (PPF interest rates are revised quarterly)

NPS is a more customizable hybrid retirement product. You can choose between equity funds, government securities fund and corporate bonds and fixed income instruments, alternative investment funds. You can choose from 7-8 pension fund managers. And most importantly, you can choose (if you go for NPS Active Choice) how much money is invested in equity and how much in debt, that is, you can pick your asset allocation yourself. So compared to PPF, NPS does offer a lot of flexibility in terms of asset allocation. Read more about NPS Investment Schemes & Choices.

That is about all the major differences between NPS and PPF that you should be aware of as NPS subscribers and PPF savers.

Many people don’t like NPS because of its poor liquidity and the fact that 80% of NPS corpus has to be annuitized if you retire earlier than 60. But it can still work for those people who are not disciplined enough financially and are better off getting a fixed income after retirement. Buying annuity from a part of the retirement corpus isn’t that bad an idea if you think about it. But having said that, depending solely on NPS is also not a wise thing. Using it in combination with maybe EPF + PPF or/and Equity Funds can be one of the better ways to take.

But think about it for a moment.

We are talking about both NPS and PPF in terms of retirement. And for most people, the nasty problem called retirement is years away. That is, its in the (very) long term. And you know…and I know… that when it comes to investing for the long term, equity gives potentially higher and inflation-beating returns.

So are NPS and PPF really good for retirement planning?

Here I would like to tell you that PPF is a pure debt product. So comparing it with equity isn’t actually right. It’s unfair.

On the other hand, NPS is a hybrid product which gives the flexibility of keeping equity allocation high or medium or low. So we should only compare equity with NPS’s investment choice where equity is high. Comparing it with low-equity NPS isn’t correct either.

Remember, when it comes to investing – it’s necessary to have proper asset allocation for the financial goal being targeted. How much equity % and how much debt % depends on the investor’s risk appetite + capacity and goal timelines, among other things.

When it comes to equity itself, for most people, taking the Equity Mutual Funds is the way to go. And there are many Equity SIP Success Stories to inspire. Equity has the potential to create immense wealth and is quite suited for saving towards goals like retirement. And to be honest, SIP in Equity Funds is Best Bet for common investors.

But every investor’s retirement needs are unique. His/her personal situation is unique. So one person’s retirement plan can differ from others. So it’s possible that different people will find different retirement strategies which suit them, like:

• EPF (debt) + PPF (debt) + NPS (high equity)
• EPF (debt) + PPF (debt) + NPS (moderate equity) + Equity Funds
• EPF (debt) + PPF (debt) + NPS (moderate equity) + Equity Funds
• EPF (debt) + NPS (moderate equity) + Equity Funds
• EPF (debt) + NPS (high equity) + Equity Funds
• PPF (debt) + NPS (low equity) + Equity Funds
• PPF (debt) + NPS (low equity) + Equity Funds + Debt Funds

Mutual funds definitely offer investors a variety of options for retirement planning. For example – if someone invests in EPF and has much more than Rs 1.5 lac to invest every year (limit of PPF), and doesn’t want to be locked-in till the age of 60 in NPS, then maybe he is best suited for a portfolio of equity and debt funds.

No doubt PPF and NPS are great products in their own ways. But even mutual funds can be used to easily plan for your retirement through a mix of equity and debt schemes. And to be fair, this gives much greater flexibility to customize asset allocation and take tactical calls (more so for advanced investors). Within equity funds, the tax-saving ELSS funds are often compared with PPF. I did an analysis here at Tax-Saving ELSS funds vs PPF.

When it comes to saving for your retirement, you have many products like EPF, PPF, NPS, Equity Funds, Debt Funds. You need to identify which is the best suited for your unique needs and then invest in those products.

If you are unable to save for your retirement properly, do take help of fee-only retirement planners. They will guide you properly about how to plan and save for retirement correctly:

Stable Investor’s Retirement Planning Service

 

People will continue to invest in PPF and NPS for retirement savings. And there are differences between PPF vs NPS that will sway them towards either or both NPS and PPF. But I must remind that just because these retirement products offer tax saving doesn’t mean that saving tax should be the primary driver of your decision to choose retirement savings product. It will derail your retirement. Don’t let that tragedy happen to you.

Find out how much money you need for retirement and then pick the right product – PPF or NPS or Equity Funds or use a mix of them.

I hope this note on NPS vs PPF was detailed enough to highlight the differences between PPF and NPS for retirement and tax saving in India.

There is no one simple answer to NPS vs PPF: Which is better for retirement savings?

Our comparative analysis of PPF (Public Provident Fund) Vs. NPS (National Pension System) shows that in some aspects PPF is better (like unrestricted access to PPF maturity amount with no compulsion for annuity purchase). While in many other NPS does better (like allowing higher equity exposure for long term retirement savings and giving potentially higher returns).

So maybe, instead of choosing between NPS and PPF, a combination of both may be a good idea for many people. For others, depending on their actual retirement requirements, a suitable retirement strategy can be created for building a robust retirement corpus to last a lifetime in India.