Although the National Pension System (NPS) and Public Provident Fund (PPF) are backed by the government and offer tax deductions, their objectives and return rate frameworks differ.
While NPS is a market-linked pension savings vehicle whose return rates depend on the fund managers’ performance, PPF is not a retirement-specific vehicle though it can also be used for that goal and has fixed returns set by the government every quarter. The payout structures of these instruments are also different.
Here’re some basic differences between the two:
Safety: Both NPS and PPF are government-backed schemes. However, NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), while PPF is clubbed under post office savings schemes.
Returns: NPS does not offer a fixed return. Returns can vary depending on the investing option you choose, according to your risk-taking appetite. NPS offers four investing options—up to 75 per cent in equity (E), up to 100 per cent in corporate bonds (C) and government securities (G) each and up to 5 per cent in alternate assets. Your returns will depend on the exposure you take to one or more of these investment options.
PPF, on the other hand, has a fixed return rate set by the government every quarter. Traditionally, PPF rates have been in the range of 7-8% annually. Currently, the return for the June-September 2022 quarter is 7.1%. It has remained the same for quite some time. It was at 7.9 per cent in the January-March 2020 quarter, while it was 8% in April-June 2019.
Liquidity: NPS matures at 60 years of age but can be extended to 70 years. Withdrawals are allowed up to 25% of your total contributions three years after account opening under the provision of a partial withdrawal facility. However, only three withdrawals are allowed till maturity, which can be availed of on grounds such as marriage, children's education, house purchase or construction, and crucial illnesses such as cancer or kidney failure.
On the other hand, PPF has a 15-year tenor and, typically, allows partial withdrawals from the seventh year from the account opening. The maximum partial withdrawal amount is 50% per fiscal year based on the account balance of the previous financial year. The PPF scheme also offers loans against your account balance from the third to the sixth financial years. However, the maximum loan amount is 25% of the balance at the end of the 2nd financial year.
Taxation: Up to Rs. 1.5 lakh is tax-deductible for NPS investment under Section 80C of the Income-tax Act, 1961. An additional income tax deduction of Rs 50,000 can be availed under Section 80 CCD (1B). One can withdraw up to 60% of the total amount tax-free on completion of the NPS tenure, but 40% of the balance must be invested in an annuity (monthly income), which is taxable.
Note that no tax benefits are available on contributions made in the NPS Tier-II account.
PPF enjoys the exempt-exempt-exempt (EEE) status. Account holders also get a tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income-tax Act. There is no tax on the interest accumulated during the tenure of the PPF and the maturity amount is also fully tax-exempt.