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NPS Vs PPF: Which Is A Better Investment Proposition?
The National Pension Scheme, more popularly known as NPS is a more recent phenomenon as compared to the Public Provident Fund or PPF.
But, if you analyze carefully, there is little doubt, that the PPF is indubitably, a much better proposition than the NPS.
NPS Vs PPF: Why the PPF is better?
a) Interest rates
The interest rate on the PPF is 8.1 per cent. At the moment this is aligned to market rates and it is very difficult to say where this could be headed in the future. The government will revise interest rates every quarter.
The money from PPF is invested in the safe and sovereign government securities. As far as the NPS is concerned, it depends on your choice. If you choose debt schemes your returns could vary and you can also choose equities.
It is difficult to say what the returns under the scheme could be, but, if you choose debt under NPS, the returns could be lower than PPF, because of charges.
b) Charges
In the PPF there are no charges whatsoever and you get the entire interest rate. On the other hand there is a fund management charge in the case of the National Pension Scheme, thus reducing your overall returns.
You can choose from a number of fund management companies that have been shortlisted for the purpose.
c) Small amounts required for PPF
Another advantage of the PPF is that the amount of investment required is rather small as compared to the NPS.
The NPS requires Rs 6000 every year vs just Rs 500 for the PPF.
d) Tax benefits of NPS vs PPF
Investment in the Public Provident Fund qualifies for tax benefits under Sec80C of the Income Tax Act upto an amount of Rs 1.5 lakhs.
On the other hand, the NPS gives you a tax benefit of Rs 2 lakhs and is perhaps the only advantage vs the PPF
e) Taxation on maturity
NPS has tax benefit on the capital appreciation amount, but, not on the principal amount.
PPF is completely tax free in the hands of the investor.
Lock in period the lock-in period also favours the PPF, in whose case the lock-in is just 15 years, whereas in the case of the National Pension Scheme there is a lock-in period until you attain 60 years of age.
Again, after that 60 per cent of the sum is returned back, while 40 per cent has to be invested in an annuity product. Really, a product that has far too many complications.
Conclusion
In the NPS vs PPF battle, one would be inclined to vote for the tried and tested PPF. The NPS is far more complicated and one is not sure of the returns. Later, the amount is invested in an annuity. The tax liability on maturity also favours the PPF. Also, you can invest much smaller amounts.
So, if you are choosing between the NPS and the PPF, we would prefer the latter for a number of reasons listed above.
Cannot find any significant reason to choose the former, except the fact that the tax benefits of Rs 2 lakhs is much better than the Public Provident Fund.
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