Indian masses prefer PPF and NPS for parking their funds. It is obvious that both the funds are a secured way of expecting a guaranteed outcome. By strategically investing in these funds, one can create corpus of a substantial amount. Calculators could be of help to know which one is better.
The distinctive features of PPF and NPS are as under to throw more light upon which more suitable according to an individual’s needs:
- The interest rate offered by the PPF is @ compounded rate of 7.1% currently. It is calculated on the minimum balance in the account between the 5th and the last date of the month.
NPS subscriber has an option for a higher ratio of equity as compared to debt yielding better returns over a long period of time. NPS is a voluntary contribution scheme. If balanced properly, the equity and debt combination can result in about 10% per annum.
- A PPF account can be opened at designated branches of Post offices or banks.
There are banks, financial intermediaries and brokerage houses known as PoPs through which an account can be opened in case of NPS. Both the schemes allow online facilities.
- PPF account is usually for a tenure of 15 years and extendable if the subscriber wants to by another five years irrespective of contributions. NPS is a superannuation plan, and it matures only at 60 years of age or up on retirement, whichever is earlier.
- PPF is a debt oriented, government backed plan.
NPS is market linked and comprises of a combination of both equity and debt.
- PPF carries a floating rate of interest and is revised by the government on a quarterly basis.
NPS returns are dependent upon the equity-debt mix and market volatility. However, they are tightly regulated.
- Annual contribution in PPF is limited up to a maximum of Rs.1.5 lakh.
Whereas there is no such limit on contributions towards NPS. Thus, those who want to make more investments are free to do so.
- The benefit of investing in PPF is that it qualifies for a tax deduction of Rs.1.5 lakh in a financial year. The interest earned thereon as well as the amount received on maturity are all exempt from tax, popularly known as EEE benefits.
Contribution of a maximum amount of Rs. 2lakh is eligible for deduction under the NPS. Lum-sum amount received by way of annuity is exempt but income received therefrom is taxable.
- All citizens between age of 18-65 years of age are eligible to invest in NPS including minors with a guardian, whereas only resident Indians can contribute towards a PPF account.
- Withdrawal from the PPF account is allowed after 5 years from the end of the financial year of investment.
NPS allows withdrawal on fulfilment of specific purposes.
- To keep the PPF account active a minimum investment of Rs.500 should be made in any particular financial year. Failure to do so will make it designated as ‘inactive’ and a penalty shall be charged.
In case of NPS all government employees can contribute 10% of their basic salary plus dearness allowance towards the scheme. (w.e.f. Jan 1st,2004) The state or the Central government contribute 14% of the same towards it. When an individual voluntarily contributes towards it the tap will be a maximum of 20% of gross total annual income. There is no limit on frequency and timing of investment.
- In PPF the investment amount and the return thereon can be withdrawn after a 15-year period.
In NPS the withdrawal is permitted up to 60% of the corpus as lumpsum and 40% must be kept invested in purchasing an annuity plan giving regular income.
Either or both the above are useful. Use PPF if you choose for a higher contribution as part of your retirement plan. When less than 15 years are left to your retirement, PPF may not be a suitable option, unless you are very risk averse.
Use PPF to earn fixed returns and NPS for market linked returns to balance your portfolio.
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Bhoi Smrutirekha Dharanidhar