​PPF vs NPS

 

It is the risk-appetite of the investor that would decide which investment tool is better not the return in long term as both have the capacity to beat the average rate of inflation.

 

PPF vs NPS: Risk and Returns

 

Public Provident Fund is suitable for those investors who have zero risk appetite. However, if an investor is ready to take some risk, NPS scheme is better as it gives higher returns.

 

PPF interest rate is subject to change on quarterly basis whereas in NPS scheme, the investor has option to choose one’s equity exposure

 

Public Provident Fund or PPF is one of the limited risk-free investment tool that can yield higher average rate of inflation as PPF interest rate today is 7.10 per cent per annum. 

 

While PPF is completely a debt instrument, National Pension Scheme or NPS is a mix of both equity and debt where an investor can choose up to 75 per cent equity exposure on one’s investment. 

 

Hence, if an investor is in no mood to take any risk, then opening a PPF account is better option whereas for an investor who is ready to take some risk, NPS account would be a suitable option for such investor.

 

PPF vs NPS: Income Tax Benefits

 

Both PPF and NPS allow income tax exemption in investment up to ₹1.50 lakh under Section 80C of the income Tax Act.

 

However, in NPS, there is additional income tax rebate available under Section 80CCD. Under Section 80CCD, a taxpayer can claim tax benefit on up to ₹50,000 invested in one’s NPS account in single financial year.

 

So, if an investor is ready to take some risk, should invest in NPS ahead of PPF as it would allow him or her to claim an additional income tax benefit on up to ₹50,000 investment other than ₹1.50 lakh under Section 80C.

 

PPF vs NPS: Interest Rate

 

In PPF, interest rate is announced on quarterly basis and compounded on yearly basis. So, PPF interest rate is subject to change on quarterly basis whereas in NPS account, the investor has option to choose one’s equity exposure. 

 

One can choose up to 75 per cent equity exposure in NPS account. So, one’s investment in PPF is 100 per cent debt investment whereas one’s NPS investment is a mix of debt and equity. 

 

If an investor chooses 60 per cent equity exposure and 40 per cent debt exposure, in that case equity investment is expected to yield at least 12 per cent per annum in long term whereas debt exposure may yield 8 per cent in long term. 

 

So, the net NPS interest rate expected in 40:60 debt-equity ratio is 10.40 per cent (7.20 in equity and 3.20 in debt exposure).

 

Thus, compared to PPF account, one’s retirement corpus will grow 3.30 per cent faster in NPS in long term.

 

If an investor keeps debt-equity exposure in 50:50 ratio, the NPS return would be 10 per cent in long term, which is still 2.9 per cent higher from current PPF interest rate of 7.10 per cent.

 

PPF vs NPS: Which is better

 

So, PPF is suitable for those investors who have zero risk appetite. 

 

However, if an investor is ready to take some risk, NPS is better as it gives around 3 per cent to 3.30 per cent higher return. 

 

Apart from this, NPS account holder can claim income tax benefit on up to ₹2 lakh investment in single financial year whereas this benefit in PPF is capped at ₹1.50 lakh on a single fiscal.

 

However, it’s the risk-appetite of the investor that would decide which investment tool is better not the return in long term as both have the capacity to beat the average rate of inflation, which falls around 5-6 per cent in long term.

 

 

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