PPF or NPS or Both? Make The Right Choice!

After reading series of my articles on NPS in the columns of DNA, few readers have expressed the desire to know how does NPS fare as compared to PPF, whereas some have even gone to the extent of knowing that how are the two comparable. Though it is difficult to compare the two, but I will sketch their distinct features which will enable the readers to draw the parallel or bring out the contrast between the two.

Who can open the account
Any Indian resident can open a PPF account. However a Non Resident  Indian(NRI) cannot open the PPF account. Where as any person who is a citizen of India can open the NPS even if he is an NRI. A PPF account can be opened in the name of a minor child by the parent or legal guardian. However for opening an account under NPS you should have completed the age of 18 years and should not have completed the age of 60 years.

Limits on contributions and Tax implication
As per the present provisions of Public Provident Fund act, you can contribute upto Rs. 70,000 in a PPF account and claim the same as deduction from your income within the overall limit of Rs. 1 lacs.  However the minimum contribution in a year should be minimum Rs. 500 and you can make maximum twelve contributions in a year. For claiming the tax benefits, you can contribute to your  own PPF account, to your child’s  or even to your spouse’s account. However this limit of Rs. 70,000 is proposed to be raised to Rs. 1 lac as per the recommendation made by a committee.

However in respect of contribution to NPS account as the law stands today, the same qualifies for tax deduction only if the contribution is made to your own account. As against the limit of Rs. 70,000 for PPF, you can contribute upto Rs. 1 lac to your NPS account and claim the tax benefits. However this is subject to your contribution being within 10 % of your Gross Total Income in case you are self-employed. But if you are employed, your contribution should be within 10% of your salary. Please note that you can even contribute more than the above amounts to your NPS account but the tax benefits will be available to the extent mentioned above. So NPS provides you the liberty to contribute any amount to your account which is not available in case of your PPF account. Under NPS you need to make minimum contribution of Rs. 6000 in a year however the minimum amount per contribution is Rs. 500 only.

If your employer contributes towards your NPS account upto 10% of your salary, the limit of Rs.1 lac as prescribed under Section 80CCE is not applicable. This mechanism of employer’s contribution being outside the limit of Rs. 1 lac helps you in creating a huge retirement corpus in case you are in the highest tax bracket because there is  absolutely no limit on the employer’s contribution for claiming the tax benefits.

Tax implication on amount received on maturity

As per the present tax laws, the amount received from PPF account on maturity is fully exempt. The interest credited to the PPF account year after year is also exempt at present. In case of your NPS Tier I account, once you reach  the age of 60 years, it is mandatory that you  use 40% of the accumulated amount  for purchase of an annuity from Life Insurance Company registered in India. The balance  60% is exempt from tax. The annuity received from insurance company is taxable presently and is proposed to be taxable under the DTC as well.

Flexibility once the account matures

The tenure of  PPF account is fixed for 15 years and matures on 31st March of the year in which you complete the 15 years. However you have the option to extend the same for a block of five years at one time and continue to contribute. Whereas in case of NPS, it is mandatory  to  withdraw at least 40% of the amount accumulated for the purchase of an annuity and  the option of  extending  the same is not there. You cannot make any contribution to your NPS account after completing 60 years of age. However with regard to  money left after purchase of annuity, you have the option to retain the account upto your reaching the age of 70 years subject to  withdrawing minimum of 10% every year.

Rate of returns generated on both these products

In PPF the rate of return is fixed for a given period and changes only with  notice.  Whereas in case of your NPS the rate of return depends on the asset class combination and performance of the pension fund manager. The returns on your contributions may be volatile in the short-term but since you have the option to choose upto 50% investment in equity class, the return which you can expect in the long-run in all probability is higher than what you can get from your PPF account.

Position after DTC

As per the draft of the DTC presented in the Parliament, only Employee Provident Fund, PPF contribution and NPS  will qualify for deduction of Rs. 1 lac.  This way both these items will qualify for deduction in the DTC direct tax code proposed as of today. With regard to tax treatment of employer’s contribution to NPS account, the same first shall be treated as salary and deduction be allowed from the salary itself within the limit of 10% of salary. So even after the DTC comes into effect, the employer’s contribution will be fully deductible from your salary itself like the present deduction for professional tax.  As per DTC even contributions made by you towards NPS accounts of your spouse and child will also qualify for deduction within the limit of Rs. 1 lac.

Purpose of contribution

The contribution to PPF can be used for the purpose of building corpus for any financial goal but not necessarily for building retirement corpus as the tenure of the account is 15 years which may not necessarily co-terminate with you reaching the age of 60 years. Contribution to your children’s account can be used for the purpose of accumulating funds for their  education/marriage. However in case of NPS, the tenure is not fixed by  number of years but you can contribute in this account upto the age of 60 years. Hence the sole purpose of contributing in NPS is to accumulate funds for retirement and to purchase an annuity once you complete the age of 60 years.

Now that the distinct features of both the schemes are before you. You can take a call where to invest. Though there may be some sharp contrast between the two but there is no doubt that both compliment each other well too. And will go a long way in building a corpus for taking care of your future needs.

So refrain from the either / or mode and invest in BOTH

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