NPS or PPF? What should be your retirement investment mix?
The features of the two scheme are distinct and in places rather sharply so.
So now you know about the National Pension Scheme (NPS) and how it can serve your retirement needs. But how does it stack up against the Public Provident Fund (PPF), another avenue for long-term investment? It is difficult to compare the two due to distinct features. All the same I have sketched the distinctive features of the two, which should help readers draw the parallel or bring out the contrast between the two.
Who can open an account?
Any Indian resident can open a PPF account. It can even be opened in the name of a minor child by the parent or legal guardian. However, a non-resident Indian (NRI) cannot open one. There is no age limit up to which you can continue contribution in the account or even up to what age you can open the PPF account.
An NPS account, however, can be opened by any person who is a citizen of India, even if he or she is an NRI and residing outside India. 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 have to contribute a minimum amount of Rs 500 and have to contribute maximum Rs 1,50,000 in a PPF account, with 12 contributions allowed in a year. In order to claim tax benefits, you can contribute to your own PPF account, to your child’s or even to your spouse’s account.
However, in respect of contribution to NPS account, as the law stands today, tax deduction is available only if the contribution is made to your own account. There is no monetary limit on contribution into the NPS account as long as it does not exceed 10 percent of your salary or 10 percent of your gross total income in case you are self-employed. However, the tax benefit is restricted to Rs 1.50 lakh which is available for PPF contribution. Moreover under Section 80 CCD(1B) in addition to the limit of initial Rs 1.50 lakh, you can contribute additional Rs 50,000 to your NPS account and claim tax benefits. So, effectively you can contribute and claim tax deduction up to Rs 2 lakh in respect of your NPS account whereas the deduction in respect of PPF is restricted to Rs 1.50 lakh. Please note that the initial limit of 1.50 lakh is applicable for PPF and NPS taken together and does not apply individually to both.
You can even contribute more than the above amounts to your NPS account, but the tax benefits will only be restricted to the amounts mentioned above. So, NPS provides you the liberty to contribute any to your account which is not available in case of your PPF account. Under NPS, you need to make a minimum contribution of Rs 1,000 in a year, with a minimum of Rs 500 single contribution.
If your employer contributes towards your NPS account up to 10 percent of your salary, the limit of Rs 1.50 lakh as provided under Section 80CCE is not applicable. This mechanism of employer’s contribution being outside the limit of Rs 1.50 lakh helps you in creating a huge retirement corpus in case you are in the highest tax bracket because there is absolutely no monetary limit on the employer’s contribution for claiming the tax benefits within the 10 percent of salary limit.
Tax implication on maturity amount
As per the present tax laws, the amount received from a PPF account on maturity is fully exempt. The interest credited to the PPF account year after year is also exempt.
In case of your NPS Tier I account, once you reach the age of 60 years or 70 years in case the same is extended, it is mandatory for you to use 40 percent of the accumulated amount for purchase of an annuity from a life insurance company registered in India. Of the balance 60 percent the 40 percent is exempt from tax and only 20 percent is taxable. However, if you purchase annuity for 60 percent of the total corpus, you do not have to pay any tax at the time of withdrawal. The annuity received from insurance company is taxable which will, however, be taxed at a lower rate in all probability after your retirement.
Flexibility at maturityThe tenure of PPF account is fixed for 15 years and matures on March 31 of the year in which you complete the full 15 financial years. However, you have the option to extend the same for a block of five years at one time and continue to contribute. You can also extend this without contribution.
In case of NPS, however, it is mandatory to withdraw at least 40 percent of the amount accumulated for purchase of an annuity and the option of extending beyond 70 years is not available in case of NPS. You cannot make any contribution to your NPS account after completing 60/70 years of age.
Rate of returns
In PPF, the rate of return is fixed for a quarter and is reviewed by the government every quarter. In case of NPS, however, 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 up to 50 percent investment in equity class, the return which you can expect in the long run will, in all probability, be higher than what you can get from your PPF account. There is one pension fund which is approved by The Pension Fund Regulatory and Development Authority (PFRDA).
Purpose of contribution
Contribution to PPF can be used for the purpose of building a corpus for any financial goal but not necessarily for building a 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 the number of years, but you can contribute in this account up to the age of 60/70 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 60/70 years.
As you can see now, the features of the two scheme are distinct and in places rather sharply so. It can be said without doubt, however, that they complement each other and can be used together, rather than on an either-or basis, to build your desired corpus.Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at email@example.com