OK, so 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. However 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 bar for opening a 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. 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 can contribute a minimum amount of Rs 500 and maximum Rs.1,50,000 in a PPF account, with maximum 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. As against the limit of Rs1,50,000 for PPF, you can contribute any amount to your NPS account but the tax benefit will be available for Rs. 1,50,000/- only under Section 80 CCD(1), together with other items of Section 80C and 80 CCC. However, this is subject to your contribution being within 10% of your gross total income [20% wef Fy 2017-18] in case you are self-employed and 10% of your salary if you are employed. Moreover you are also allowed an additional deduction for Rs. 50,000/- under Section 80CCD(1B) over and above the limit of Rs. 1,50,000/-.
Please note that you can even contribute more than the above amounts to your NPS account, but the tax benefits will only be available to the extent mentioned above. So, NPS provides you the liberty to contribute any amount to your account which is not available in case of your PPF account. Under NPS, you need to make a minimum contribution of Rs6,000 in a year, with a minimum of Rs 500 per contribution.
Your employer can contribute any amount towards your NPS account within the limit of 10% of your salary. This mechanism helps you in creating a huge retirement corpus in case you are in the highest tax bracket because there is absolutely no limit on the employer’s contribution for claiming the tax benefits.
- Tax implication on maturity amount
As per the present tax laws, the amount received from PPF account on maturity is fully exempt. The interest credited to the PPF account year after year is also exempt at present. In case of your NPS Tier I account, once you reach the age of 60 years, it is mandatory that you use 40% of the accumulated amount for purchase of an annuity from a life insurance company registered in India. 40% of the accumulated amount whenever withdrawn becomes taxable in your hand.
- Rate of returns
In PPF, the rate of return is announced for each quarter and changes only with advance notice. 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% 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.
- 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 years which can be extended till 70 years . Hence, the sole purpose of contributing in NPS is to accumulate funds for retirement and to purchase an annuity.
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.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)