The world of finance has been evolving with the speed of light for more than a decade. Hundreds of new types of financial instruments have entered the market, which makes it confusing to select a suitable one among all of them for Tax Saving.
If you are also one of the many who are confused about choosing the best options for PPF VS NPS investors, this post will answer all your questions. We have discussed two of the Best Investment Options in detail, along with all the things that you should consider.
Table of Contents
What exactly are NPS and PPF?
NPS or the national pension system is an investment vehicle set up by the Govt. of India. It is a market-related pension saving vehicle whose returns depend on the markets and the fund managers managing the scheme.
It does not have fixed returns, and the returns keep changing based on the sentiments of the market.
PPF or the public provident fund, on the other hand, is a Government-backed saving vehicle that has fixed rates. The rates of return are fixed by the Govt. for every quarter. The return is not linked to markets directly but has an indirect impact.
PPF, unlike the NPS, is not a pension scheme and can be used for any investment purpose or goal.
What is the difference between NPS and PPF?
There are a lot of differences between an NPS and a PPF. We are listing all the significant differences along with the definitions in this section.
If you are looking for the safest option, PPF should be your choice. NPS is not “safe” because the markets impact the returns. The returns also depend on your manager, and you can even change your managers if you are not satisfied with the returns.
PPF, on the other hand, has fixed returns and is controlled by the Govt. which makes it the safest option.
PPF has fixed returns set by the Govt. and returns of NPS changes according to market conditions and decisions are taken by the fund managers.
PPF has a tenure of 15 years, and you can request for partial withdrawals after a specific number of years. This number is usually around 6-7 years, depending on the bank that you choose.
NPS, on the other hand, matures at the age of 60 years. You also get options to extend this to 70 years, and you can also request for withdrawals of up to 25% of your contributions to a maximum of three times.
Which one is the best PPF or NPS?
There is no right answer while choosing between the two options. The decisions depend on the person making the investment.
If you are looking for a long-term retirement investment, NPS should be your choice, and if your prime focus is safer returns after a specific period in your life, then PPF should be your choice.
You must consider all the factors before making a decision and make sure to read all the sections of this post before making a decision.
Can I have both NPS and PPF?
There is no restriction in investing in both of these instruments at the exact same time. In fact, there is a large section of the population that does that because of the tax benefits that come along.
Can I invest more than 50000 in NPS and PPF?
The limit of tax exemptions in section 80C is Rs. 1, 50,000. You can invest in PPF and get tax exemptions to the limit of Rs. 1, 50,000.
If you have already exhausted this limit, you can opt for NPS which falls under section 80CCD (1B). This has been introduced as an additional deduction, and you can avail of this benefit along with PPF.
But this also comes with a limit of Rs. 50,000. You can obviously invest more than Rs. 50,000 but that will not come under the tax-saving bracket which is basically the biggest reason for choosing this instrument.
Also, the investments in NPS cannot be more than 10% of your salary.
What is the maximum limit for NPS and PPF?
The maximum tax exemption limit for both NPS and PPF under section 80C is Rs. 1,50,000.
The limits of the investment amount in NPS are Rs. 6000 with no maximum.
The limits of investment in PPF are defined between Rs. 500 – 1, 50,000.
What are NPS interest rates and Provident fund rates?
The interest rates of NPS are between 12-14%
The interest rates of PPF vary according to various factors. For reference, the latest interest rates were 7.1% in Q2 of the financial year 2020-2021.
Limitations of NPS and Public Provident Fund?
Along with all the benefits, there are numerous challenges that one has to face for both of these funds.
- The most significant restriction is with the lock-in period. You cannot withdraw the money till the age of 60
- The corpus you receive at the age of 60 will invite taxes(60% of the amount)
- You cannot invest more than 50% of your investments inequities
- You cannot request for more than 25% of your investment more than 3 times in your life
- The lock-in period is a big one, i.e., 15 years.
- You cannot request more than 25% of your investment at particular times within the period.
- You cannot invest more than Rs. 1.5 Lacs.
- Joint accounts are not permitted.
Mode of investments in NPS and PPF
There are various modes of investment, and it is imperative to understand all of these to make a sound decision.
The first step before investing in NPS is selecting the PFM (Pension fund manager). You have to choose among one of these PFM’s –
1. Birla Sun Life Pension Management Limited
2. HDFC Pension Management Company Limited
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited
Next in line of selection is choosing between Active choice or auto choice.
In the active choice, you will have to provide your inputs into your preferred investments and also the percentage slabs.
In the auto choice, this selection is made on a pre-defined portfolio, and the investment is spread across. The choice is made based on the age of the subscriber AKA you.
You also have to decide between all the available asset classes including the four –
2. Corporate debt
3. Government Bonds
4. Alternative Investment Funds
Investment into a PPF, on the other hand, is pretty straightforward, and you can easily open an account with the post office or any nationalized bank. You also have the option to pay via any payment mode, and banks accept most of the payment modes, including cash, cheque, DD, and online fund transfer.
Who can be the nominees in NPS and PPF Account?
PPF gives you the liberty to nominate one or more than one person. In case you are nominating more than one person, you have to specify the share of each person in the nomination.
No nomination is allowed for accounts opened on behalf of minors.
You can nominate a minor or major as the nominee for an NPS account. If you are choosing a minor as the nominee, you need to furnish the details of the guardian of the nominee along with the date of birth of the minor.
I am sure this gives you a holistic view of all the things related to these investment types. People have been choosing these options for centuries and will continue to do so in the future because of the benefits and safety of investment that you get.
Since both of the investments have a long lock-in period, you must consider everything before making a decision that will impact your life in a big way!