PPF Vs NPS: Interest Rates, Withdrawal Rules, Tax Benefits, Lock-In, Other Benefits
PPF contributions are locked in for a period of 15 years. NPS, however, has a longer lock-in and the corpus stays locked-in till the age of 60 years.
Both Public Provident Fund (PPF) and National Pension System (NPS) serve similar, if not the same, purpose of offering financial security to subscribers at a later stage of your life. The functioning behind the two instruments is almost the same that entails investing regularly into a fund, which invests further into equity and debt instruments. And the regular investments, in conjunction with compounding, enables the money to mature into a significantly large corpus over a long period.
Since both the investment options have strict withdrawal rules before maturity, and the longer lock-in periods, there is a vast scope of money to grow. A significant difference lies in greater flexibility offered to the NPS subscribers, and the scope of making more money by virtue of its higher exposure to equity instruments.
Eligibility: Both Public Provident Fund (PPF) and National Pension System (NPS) are voluntary contributions. It’s completely the prerogative of a subscriber to choose one of the two savings options. One can even choose to invest in both of them. Any Indian citizen can open the PPF and NPS accounts. NPS account can be opened even by an NRI (non-resident Indian). A joint account option is not allowed in either of the two cases.
Interest rates: From January 1, 2018, the rate of interest accrued on PPF account is 7.6 percent per annum, whereas the interest rate on NPS contribution is dependent on the pension fund manager (PFM) you choose. To manage the fund, the subscribers can choose any of the eight pension fund managers. These are ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and DSP Blackrock Pension Fund. If you don’t choose a PFM, the SBI Pension Funds Private Limited becomes the default manager.
Lumpsum or annuity: At the time of retirement, NPS subscribers are allowed to withdraw up to 60 percent of corpus in lumpsum, while the remaining 40 percent of corpus ought to be used as annuity, though the subscribers are free to allocate up to 100 per cent of corpus in equal annual withdrawals known as annuities.
Out of the 60 percent of corpus, only 40 percent is tax-free while the remainder is tax-free.
In the case of PPF, however, there is no concept of annuity. The money matures into a corpus which can be withdrawn without any tax liability.
Equity exposure: The PPF subscribers are allowed to have up to 15 per cent of equity exposure, however, the cap is likely to be removed soon, whereas, the NPS subscribers can have upto 50 percent of equity exposure in case of active fund option, as per the rules of PFRDA (Pension Fund Regulatory Development Authority). The young subscribers below the age of 35 are even allowed to allocate upto 75% of equity allocation under the aggressive lifecycle fund.
Tax exemptions: While PPF is exempt at all three levels of contribution, withdrawal and interest accrual stage, some part of NPS corpus (20 percent) is taxable at the time of withdrawal of lumpsum. The subscribers are allowed to use 60 per cent of the corpus as lumpsum out of which only 40 percent is tax-free. The maximum exemption allowed for the purpose of tax exemption is Rs. 1.5 lakh in case of PPF contribution, whereas, the NPS exemption is allowed for a maximum of Rs. 2,00,000 per annum.
Quantum of contribution: In the PPF, an individual can open account with a contribution of Rs. 100, but s/he has to deposit a minimum of Rs. 500 in a financial year and maximum of Rs. 1,50,000.
At the same time, NPS subscribers must make a minimum contribution of Rs. 1,000 per annum for the tier 1 account. For the tier-2 account of NPS, there is no minimum requirement of contribution, which used to be Rs. 250 earlier.
Maturity: PPF contributions are locked in for a period of 15 years but can be extended within a year of maturity for a period of five years. NPS, however, has a longer lock-in and the corpus stays locked-in till the age of 60 years. Withdrawal before 60 is also allowed but in that case at least 80 percent of the corpus ought to be allocated to annuity, which is a tax-free withdrawal.
Where to open: A PPF account can be opened in a post office or in a bank such as State Bank of India. At the same time, an NPS account is opened via your employer or even on your own (if you are an independent professional) and you will get a chance to select a pension fund manager (PFM) to manage the contributions and to make investments so as to use those contributions optimally.
Withdrawal may be allowed: Early withdrawal from the PPF is allowed but only from the seventh financial year onwards. The withdrawal amount is limited to a maximum of 50 per cent of previous year’s balance. However, one can raise a loan on the PPF account from the third financial year onwards. Withdrawal from the NPS is allowed after three years for a maximum of 25 percent of the contributions made by the subscriber and excluding contributions made by the employer.
One can withdraw for a maximum number of three times in the entire tenure of NPS and for specified purposes only: higher education of children, marriage of children, purchase or construction of house, treatment of specified disease (s) such as cancer, kidney failure and multiple sclerosis, heart valve surgery and stroke, among others.