An investment made for the future reaps a variety of benefits such as a lump sum of money after a certain time period, earned interest on the principal amount, tax advantages, and so on. There are several investment options available, including Systematic Investment Planning (SIP), Fixed Deposit (FD), Recurring Deposit (RD), Public Provident Fund (PPF), and National Pension Scheme (PPS). PPF and NPS are among the options available for developing good saving habits and a retirement corpus.
In this blog, we will discuss PPF and NPS, as well as the differences between the two.
What is PPF or Public Provident Fund?
PPF, or Public Provident Fund, allows an individual to save a portion of his or her income each year in order to build a retirement corpus. Users are given interest on their deposits. Opening a PPF account also provides the account holder with tax advantages. Because of these tax advantages, the account holder is eligible for tax deductions of up to Rs. 1.5 lakh under section 80C of the Income Tax Act. The goal of such a scheme is to encourage people to save money. Furthermore, such a scheme is ideal for those who do not qualify for the Employee Provident Fund Organization (EPFO) scheme.
The PPF can further be explained as-
- An investment option with a 15-year lock-in period
- One can withdraw the partial amount from PPF but only after 6 financial years
- Premature closure of a PPF account is permitted, but only in a few cases
- The minimum deposit amount in a year is Rs. 500, and the maximum deposit amount is Rs. 1.5 lakh
- The interest rate on PPF is 7.1 % per year as of August 2021
- A PPF account holder can invest a maximum of 12 times in a fiscal year.
- The interest on the PPF account is calculated on an annual basis
- A PPF account holder can borrow a loan against his or her PPF balance
Who can Invest in a PPF Account?
The people who can invest in a PPF account are as follows:
- PPF accounts are only available to Indian citizens
- An Indian citizen residing in another country may continue to operate his or her PPF account
- Parents/guardians can open a PPF account on behalf of their minor children
Banks are the only way for an individual to open a PPF account; however, the funds will still go to the government rather than the specific bank.
Documents Required to Open a PPF Account
Given below are the documents required to open a PPF account-
|Documents to open PPF account|
|PPF account opening form- Form A|
|KYC documents like Aadhaar card, PAN card, Voter ID card etc|
|Proof of Address|
|Passport size photograph|
|Nomination form- Form E|
What are the Limitations of the PPF Account?
Investing in a PPF account is one way to save for the future; however, it has a number of limitations, which are listed below.
- PPF accounts have a 15-year lock-in period. As a result, withdrawing the entire balance from the account is difficult
- To withdraw a partial amount from the account, one needs to first complete 5 financial years
- Premature account closure is permitted, but only if certain rules and restrictions are followed
- The PPF does not provide competitive interest rates.
- A joint PPF account is not allowed
- An individual can only contribute Rs. 1.5 lakh to his or her PPF account
- An account holder may contribute a maximum of 12 times in a fiscal year
- PPF accounts can only be opened by Indian citizens. PPF accounts cannot be opened by NRIs or Hindu Undivided Families
- Accounts may be closed prematurely in cases of educational or medical emergencies. To close the PPF account, valid documents and proof are required
What is NPS or National Pension Scheme?
NPS is an abbreviation for National Pension Scheme. It is a plan designed specifically for working people who want to save for retirement. The central government of India introduced the NPS scheme to meet the financial needs of senior citizens in the post-retirement phase.
Individuals must make a regular investment under the NPS scheme, which is then invested in various marketable investment tools. When the individual reaches retirement age (typically 60 years), the invested corpus is returned to him or her in the form of pension payment. During the employment tenure, the contribution to the scheme is voluntary
It can further be understood as-
- For the tier-I account, the subscribers are required to make a yearly contribution of Rs.6000 and Rs.500 as a one-time contribution. For the tier-II account, the subscribers are required to make a yearly contribution of Rs.2000 and Rs.250 one-time contribution
- On the maturity of the scheme, the account holder can withdraw 60% of the accumulated fund whereas 40% of the amount is used to buy an annuity
- The money invested in a Tier 1 account cannot be withdrawn until the individual reaches the age of 60. However, in certain circumstances, it is possible to withdraw a portion of the principal before maturity
- A Tier 2 account is a savings account that can be opened at any time. This type of account can only be opened if the investor already has an active Tier 1 account
- The investment made under Tier 2 can be withdrawn at any time
Who can Invest in NPS?
The following individuals can invest in NPS:
- Any Indian citizen can invest in NPS
- NRIs can also contribute to the National Pension Scheme
- It is required that the individual be between the ages of 18 and 60
- Before investing in NPS, an investor must read and understand all of the terms and conditions
- The investor must submit a completed application as well as the required KYC documents
Documents Required to Open NPS
|Proof of Identity||Proof of Address|
|Ration card with photograph||Passport issued by the Government of India|
|Passport issued by the Government of India||Ration card with photograph|
|Bank passbook with photograph||Bank passbook with photograph|
|PAN card||Voter ID card|
|Driving license||Driving license|
|Certificate of Identity issued with photograph signed by the Member of Parliament or Member of Legislative Assembly||Certificate of Identity issued with photograph signed by the Member of Parliament or Member of Legislative Assembly|
|Aadhaar card||Aadhaar card|
|Job card issued by MNREGA||Job card issued by MNREGA|
|Photo identity card issued by Government, Defence, Paramilitary and Police Department||electricity/water/telephone bill in the name of the individual (not less than 6 months old)|
|Ex-serviceman card||Latest house/property tax receipt (not less than 1-year-old)|
|Photo credit card||Existing valid registered lease agreement of the house on stamp paper (in case of rented/leased accommodation)|
|Voter ID card|
What are the Limitations of the NPS Account?
The following are the limitations of an NPS account:
- Tier 1 NPS accounts allow withdrawals only after the account holder reaches the age of 60
- There are some withdrawal limits as well.
- The government of India taxes 60% of the amount, while only 40% is tax-free
- Individuals are not permitted to invest more than 50% of their total investment in equities
- Market fluctuations can have an impact on the return on the investment
What are the Similarities Between PPF and NPS?
PPF and NPS are similar in the following manner-
|Similarities between PPF and NPS|
|Both the NPS and the PPF are considered retirement benefit schemes|
|There is a requirement to open an account|
|Both types of retirement funds have a long lock-in period|
|There is no tax on the final corpus|
|Premature withdrawal of funds is permitted, but only in certain circumstances|
A Detailed Comparison Between PPF and NPS?
The difference between PPF and NPS is explained as below-
|Particulars||Public Provident Fund||National Pension Scheme|
|Who can invest||Indian citizens onlyParents/guardians can open a PPF account on behalf of their minor||Indian citizens between the age of 18 to 60 years|
|NRIs can open||NRIs are not allowed to open PPF account||Yes, NRIs are allowed to invest in NPS|
|Maturity period||15 years||No fixed tenure, however, the amount can only be redeemed once the individual attains the age of 60 years|
|Partial withdrawal allowed?||Yes, partial withdrawal is allowed but only after 5 financial years||Yes, partial withdrawal is allowed after 3 years|
|Minimum and maximum deposit value||The minimum deposit value is Rs. 500The maximum deposit value is Rs. 1.5 lakh||The minimum deposit value is Rs. 6,000The maximum deposit has no limit|
|Any tax benefits||Deposits made in the PPF are eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act||The account holder can claim only Rs. 1.5 lakh in tax benefits under Section 80CCD, with an additional tax benefit of Rs. 50,000 available under Section 80CCD (2) of the Income Tax Act|
|Purchase of Annuity||Not required||40% of the amount has to be spent to buy an annuity|
|Extending the Tenure||Possible but in the block period of 5 years||Can be extended till the age of 70 years|
NPS and PPF, both are considered to be one of the best saving options to build a retirement corpus. Both the investment options have their own set of advantages, disadvantages and features and thus, should be chosen as per the requirement.