NPS vs PPF- Where to invest next?

The National Pension Scheme (NPS) and the Public Provident Fund (PPF) program are both good investment options when it comes to investing for the long term as both are backed by the government and hence have a certain sense of security attached to themselves. But which instrument suits you best?

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored social security scheme designed to serve as a beneficial retirement and investment vehicle.

Any Indian citizen between the ages of 18 and 60 can open an NPS account. All NPS gains are totally tax-free.

• i) investment flexibility
• ii) possibility of partial withdrawals
• iii) liquidity
• iv) tax benefits

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is also a long-term savings plan. The PPF programme was launched in 1968 by the Ministry of Finance's National Savings Institute with the goal of encouraging citizens to save for retirement every year.

PPF gains are also tax free, just like NPS gains.

Some other benefits of the scheme are as follows.

• i) borrow against PPF
• ii) decent interest rates
• iii) security
• iv) tax breaks

All in all, both schemes seem to have similar benefits. There is a sense of security that investors have while investing in these schemes because they are government backed. Moreover the gains from both the schemes are exempted from taxes. So which one is better suited to you?

Expert’s take

Renu Maheshwari, Board Member, Association of Registered Investment Advisors (ARIA) clarified her take on both the investment vehicles. She told Business Today, “NPS and PPF both are important tools for financial planning and especially retirement planning. Both have tax benefits under section 80 C and they both qualify as EEE (Exempt at the time of investment, Exempted returns, Exempt at the time of final withdrawal) in tax parlance. But the similarities end here.”

She explained that both the schemes are complementary investment options. She further added, “They are two very different and complimentary products rather than competing ones. The following table will give a glimpse of their differences and utility.”

Maheshwari further went on to explain that a combination of both the investments is best suited. She said, “There should be judicious combination of both the products to create a retirement corpus that can weather any storm. NPS should be used for equity allocation in retirement fund and PPF for debt allocation. Currently market based fixed income portfolios of NPS are not able to match the fixed returns of PPF. This combination will ensure a low-cost high return retirement portfolio with negligible downside risk.”

Also read: What are the benefits of PPF as a saving instrument  

Also read: Lump sum vs SIP, which Mutual Fund suits you best?