To begin with, let us look at the difference between these two products at a glance:
|Investment objective||To invest in securities with a very long term horizon||A small savings scheme with a tenure of 15 years|
|Who can invest||Individuals aged between 18-60||No age limit|
|Managed by||Government approved pension fund managers||Central Government|
|Rate of return||Not fixed||8%|
|Lock in||60 years||15 years|
|Maximum tax deduction||Rs2 lakhs||Rs1.5 lakhs|
|Maturity benefits||60% returns and 40% compulsory investment in annuity product||100% returns|
|Partial withdrawal||Allowed, subject to conditions*||Allowed, subject to conditions*|
PPF has been a very popular Government backed scheme for several decades. PPF is an investment route that invokes trust among Indian households even today. However, over the years the returns of PPF has come down from 12% to 8% (as it is market-linked now). The Government, realising the lack of retirement planning in India is making consistent efforts towards the betterment of its pension scheme. Now let us see how both of these products compare on important parameters.
The PPF is largely a fixed income oriented investment avenue. However, subscribers are allowed equity exposure of up to 15%. This means that returns from equity exposure in a PPF is limited. In case of NPS, private sector subscribers can opt for up to 75% equity exposure (earlier there was a limit of 50%). With larger equity exposure, NPS subscribers have the chance to enhance their return potential.
Thus, if we assume inflation at the rate of 5%, we will find that while PPF is generating only 3% inflation adjusted returns, NPS equity funds that have been generation 11-14% returns over the past 5 years are generating inflation adjusted returns of 6-9%.
Partial withdrawal and premature exit
Both products allow partial withdrawal and premature exit facility subject to some conditions. Let’s take a closer look.
- From the seventh year onwards, a PPF account holder is allowed on partial withdrawal per year.
- This withdrawal is limited to 50% of the total balance at the end of the financial year or preceding the current year, or 50% of the account balance at the end of 4th financial year, preceding the current year.
- Premature closure is allowed after 5 years, subject to the following conditions
2. Higher education of children- Documents pertaining to admission in a higher education institution have to be produced.
- Partial withdrawal is allowed in NPS after three years.
- Withdrawal is allowed only for specific reasons such as higher education of children, marriage of children, construction or purchase of residential house, treatment for serious ailment.
- Withdrawal amount should not exceed 25% of the contributions of the subscriber.
- A maximum of three withdrawals allowed during the entire tenure.
The last word
A comparative analysis of both these products show that the equity exposure and easier partial withdrawal norms provide an edge to NPS over PPF. On the other hand, unconditional access to tax free proceeds as against compulsory annuity purchase in NPS still makes PPF a preferred choice. In conclusion, therefore it may be said that instead of choosing either of the products a combination of both may be more effective in building a robust retirement corpus.