The National Pension System (NPS) and the Public Provident Fund (PPF) are two of the most popular long-term saving instruments that one could rely upon for building a retirement corpus.

While both are government schemes, one comes with a guaranteed return, sovereign guarantee to be specific, while the other is a market-linked product. So, here’s a brief about their features for comparison.

Public Provident Fund (PPF)

This is a government-backed small savings scheme, wherein a subscriber could contribute anything from Rs 500 to Rs 1.5 lakh per annum. It comes with a 15-year lock-in period and also offers tax benefit under Section 80C of the Income-tax Act, 1961 under the old regime.

The scheme allows partial withdrawals after five years. These withdrawal can be made once a year for specific reasons, such as medical emergency, homebuying, or events such as child’s education, and wedding. The government announces the rate of interest on PPF every quarter. At present, it is offering a rate of interest of 7.1 per cent.

Also Read: NPS Vatsalya: Another Option To Plan Your Children’s Financial Security; Know The Key Features

National Pension System (NPS)

This is a government-backed market-linked pension scheme that was originally introduced for government employees, but later extended to other citizens. It can be opened by anyone aged 18-70 years. The minimum investment amount is Rs 1,000 per annum for tier-I account. Upon maturity, 60 per cent of the corpus can be withdrawn tax-free as lump sum and 40 per cent has to be mandatorily used for buying annuity for pension income.

The government announced some major changes to NPS during Budget 2024-25.

One of them was NPS Vatsalya, which will allow parents and guardians to open an NPS account for their children and contribute on their behalf till they attain majority. The NPS account opened will later be transferred to the child upon attaining the age of majority and then will be converted into a regular NPS account.

Another was deduction of expenditure by employers towards NPS. It has been proposed to be increased from 10 per cent to 14 per cent of the employee’s salary. Earlier, this limit of 14 per cent was available only to government employees.

Which Is Better: PPF Or NPS?

Investment Tenure: A PPF can be opened for 15 years, after which it will mature. But it can be increased in blocks of five years for an indefinite number of times. There is also an option for the subscriber to either maintain the account without making any contribution and earn interest on the corpus, or continue contributing to it.

There is no such tenure in NPS. Anyone in the age group of 18-70 years can open an NPS account.

Minors:  A parent or a guardian can open a PPF account for a child. Previously no such facility was available in NPS, but Budget 2024-25 came out with a new scheme, NPS Vatsalya, which will allow parents or guardians to open an NPS account for their children and make contributions to it. Later the account can be transferred to the child after he/she turns 18 years of age.

Withdrawals: PPF allows partial withdrawal after five years. NPS allows withdrawals 15 years after opening the account.

Tax Efficiency: PPF offers tax exemption up to Rs 1.5 lakh under Section 80C of the Income-tax Act 1961 in the old tax regime. NPS offers tax benefit of Rs 1.5 lakh under Section 80CCD (1) within the overall limit of Section of 80CCE and a further tax exemption of Rs 50,000 per annum (tier I) under Section 80CCD (1B).

PPF comes under the exempt, exempt, exempt category. The investment, the interest earning as well as the maturity are all tax-free.

In case of NPS, only 60 per cent of the corpus can be withdrawn as lump sum and is tax-free as EEE.  The balance 40 per cent has to be mandatorily used for buying annuity which makes it taxable.

Returns: PPF offers a guaranteed return. NPS, being a market-linked product, will typically offer a higher return than PPF.

Corpus: PPF will offer a lump sum as a corpus. NPS will offer a portion of the corpus as lumpsum, while the balance, which has to be used for buying annuity, will be received as annuity income in the form of pension.

Also Read: Budget 2024: Employers’ Contribution In NPS Hiked To 14%; What It Means For Subscribers?

Which One Should You Choose?

Both PPF and NPS are good instruments to build a retirement corpus. PPF offers the safety of guaranteed returns, partial withdrawals, and is completely tax-exempt. It can also be extended indefinitely in blocks of five years.

NPS offers market-linked returns and the returns will be comparatively higher if one chooses to invest the bulk of the NPS contribution in equity assets.

As investments always have to be tailor-made according to one’s individual requirements and goals, the best approach would be research thoroughly about the two schemes, assess one’s needs and liabilities, the time horizon, and other factors, such as monthly contributions one can comfortably make.