Key differences between PPF account and NPS account

When it comes to retirement planning, the National Pension System (NPS) and Public Provident Fund (PPF) are both must-haves. Both offer tax benefits and have long lock-in periods. Together, they can address the needs of investors looking to earn market-linked returns and fixed returns.

Broad differences between the two:

Let us understand the differences between the two in detail:

National Pension System (NPS)

• Under the NPS you have broadly two kinds of accounts – Tier I and Tier II. The Tier I account is the mandatory account, referred to as the pension account. The regular contribution is required every year or the account will be frozen. The Tier II account is a voluntary investment account; it isn’t linked to retirement and therefore there is no minimum amount required to be contributed every year.

Type of NPS Account

• The investments you make in NPS are pooled together and managed by professional pension fund managers appointed by Pension Fund Regulatory and Development Authority (PFRDA) ––the regulator for NPS.
• You can choose the Active Choice option, where in you can invest in multiple assets – equity, debt and alternative assets - as per your choice. The maximum equity allocation is 75%. 
• Or you may go with the lifecycle fund or Auto Choice option, which is the default option. Under this option a proportion of your funds will be invested into Equity (E), Corporate Bonds (C), and Government Securities (G) dynamically as per your age
• You can exit NPS upon attaining 60 years of age or 10 years after account opening. 
• In case you exit before attaining 60 years of age, you can withdraw up to 20% of the corpus in a lump sum. It is mandatory to utilise the remaining 80% of the accumulated corpus to purchase a Life Annuity from a life insurance company registered with PFRDA. This annuity will provide you with a regular monthly pension. But if the corpus is less than or equal to Rs. 2.5 lakh, there is no need to invest in a Life Annuity. The entire amount can be withdrawn in a lump sum.
• In case you retire upon attaining 60 years or Superannuation, then you are permitted to withdraw 60% of the corpus in a lump sum, while at least 40% of the accumulated corpus needs to be mandatorily used to purchase a Life Annuity. You also have the option to defer the decision to invest in an Annuity for 3 years and defer the lump sum withdrawal till the age of 70 years. You can keep on contributing towards NPS till the age of 70 years and your fund would continue to remain invested. 
• In case of the subscriber’s demise, the entire accumulated corpus (i.e. 100%) would be paid to the nominee or legal heir. 

Benefits of investing in NPS

• You can earn market-linked returns, which has the potential to beat inflation over the long term
• Investments in the Tier-I account of NPS are deductible from taxable income under Section 80C, Section 80CCC and Section 80CCD(1) together capped at Rs 1.50 lakh per annum. Moreover, investment up to Rs 50,000 is eligible for an additional deduction from total income u/s 80CCD(1B) of the Income Tax Act, 1961. This is over and above tax benefit u/s 80CCD(1).
• Employer co-contribution up to 10% of basic and DA (without any upper cap) is eligible for tax benefit under Section 80CCD(2). This rebate is over and above 80C, and available only to the NPS subscriber.
• Up to 40% of Corpus withdrawn in a lump sum is exempt from tax. And the amount you utilise to purchase an annuity is fully exempt from tax.

[Also Read:  Five reasons why you should open a PPF account]

Conditions to keep in mind: 

• Your investment in NPS will always be exposed to the risk associated with equity markets, interest rate risk (in case of government securities), and credit risk (in case of corporate bonds). The underperformance of the scheme could drag down the overall return of your NPS account.
• While the annuity purchased will be fully exempt from tax, the pension you receive out of the annuity purchased will be treated as an income and taxed appropriately. 

Public Provident Fund (PPF)
This government-backed scheme is one of the most popular investments. And this is no surprise because PPF enjoys an Exempt-Exempt-Exempt tax status. This means contributions are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, the interest earned is tax-free, and maturity proceeds are exempt from tax. What’s more, the PPF account cannot be attached in case of debt or liability. 

• PPF has a 15-year lock-in period. The interest rate is fixed by the government and may be reset every quarter
• The minimum deposit amount is Rs 500 and the maximum is Rs 1.5 lakh annually
• You can invest in a lump sum amount or half-yearly/quarterly/monthly instalments.
• The interest is calculated on the minimum balance in your account between the 5th and the last day of every month. So, if you are planning to invest monthly, make sure your PPF account is credited with the amount on or before the 5th of every month, to get the maximum benefit, or else you would lose out on the additional interest in that particular month.
• If you forget to contribute for one year, the PPF account will be deactivated. The account can be re-activated by paying a fine of Rs 50 plus the arrears of a minimum deposit of Rs 500 for each year of default.
• You can avail of a loan against the PPF Account subject to satisfying certain conditions (by duly filling and submitting ‘Form 2’).

At the end of the maturity period of 15 years, you have three choices:
1) Withdraw the maturity amount and close the account by applying in ‘Form 3’ (earlier referred to as ‘Form C’), and furnish the passbook of the account.
2) Extend the PPF Account for a block of 5 years (multiple times without any limit) and make fresh contributions by applying in ‘Form 4’ (earlier referred to as ‘Form H’) for extension within one year from the maturity date.
3) Extend the PPF Account for a block of 5 years (multiple times without any limit) without making fresh contributions. This will earn interest on only the accumulated balance in the account.

Benefit of investing in PPF
Given the E-E-E tax status (even partial withdrawals are tax-free) and the fixed and guaranteed return, PPF is a worthy investment avenue to address your retirement needs.

Why invest in both?
Ideally, one should invest in PPF for the guaranteed and secured returns and in NPS for the market-linked returns which over the long term will help beat inflation. 

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision