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For quite some time, there has been a debate whether to invest in NPS or PPF. But now with the raising of age limit up to 70 years for joining the National Pension System, with the pension regulator raising the ceiling from the previous 65, suddenly NPS seems more lucrative than PPF.

The maximum age has now been raised to 70 for entry into NPS and maturity age raised to 75, the NPS provides one of a kind opportunity for investment and for getting pension.   Here we compare what the Public Provident Fund and National Pension System offer though both are widely considered long-term investment tools. However, PPF is completely a debt instrument while NPS scheme is a market-linked investment tool. A PPF account givews PPF interest rate on a quarterly basis while in an NPS account, one’s money gets exposure to both debt and equity. Currently, PPF interest rate is 7.1 per cent. According to tax and investment experts, if a person chooses equity and debt exposure in an NPS account in a 60:40 ratio, then one can expect to get around 10 per cent NPS interest rate on one’s investment.

In NPS return is market-linked as an NPS account gets exposure in both equity and debt. As per the government rules, NPS account holders can choose up to 75 per cent equity exposure while one’s withdrawal limit should not be more than 60 per cent of the maturity amount. However,  one should not go beyond 40 per cent for annuity purchase as annuity will give around 6 per cent returns, which is enough for one’s monthly pension. In the long-term perspective, equity investments are expected to give at least 12 per cent returns while debt exposure yields 8 per cent return. When the NPS account is having 60:40 equity debt ratio, one’s equity return in the long-term will be around 7.2 per cent (12 x 0.60) while debt exposure will fetch 3.2 per cent (8 x 0.40). So, in 60:40 equity debt exposure, the NPS interest rate is expected to be around 10.40 (7.2 + 3.2. In the worst case scenario, one’s return in NPS will be around 10 per cent if the investment is for the long-term.

PPF & NPS Calculator

Assuming Rs 8,000 monthly investment in PPF account for 30 years at 7.1 per cent returns, the State Bank of India or SBI PPF calculator suggests that one’s maturity amount will be Rs 98,88,583.  Out of Rs 98,88,583, one’s net investment throughout the investment period will be Rs 28,80,000 or Rs 28.80 lakh and the total PPF interest earned will be Rs 70,08,583.  Now assuming the same Rs 8,000 monthly investment in NPS account with 60:40 equity debt exposure, the NPS calculator suggests that one’s NPS withdrawal amount after 30 years will be Rs 1,09,40,762 while the annuity value will be Rs 72,93,841. This Rs 72,93,841 will yield Rs 36,469 monthly pension if the annuity return is assumed at 6 per cent.   Little doubt, the NPS is more suitable than PPF as it’s withdrawal amount is Rs 10,52,179 higher than PPF maturity amount and the NPS account holder will get Rs 36,469 monthly pension too. 

Also you can get a tax deduction of up to Rs 2 lakh each year on contributions to the NPS. Before maturity, there is no tax on NPS. On maturity, the NPS is partly taxed.   In terms of cost and taxation, mutual funds are the closest competitors to the NPS. Equity mutual funds held for more than one year are taxed at 10% for gains above Rs 1 lakh. Debt mutual funds held for more than three years are taxed at 20% and given the benefit of indexation. If you factor in indexation, the effective tax rate moves close to 10%, which is similar to the blended rate you pay on NPS corpus at maturity. But there is a hidden benefit to the NPS because it is tax-free to the heirs on the death of the investor.

Indeed NPS has an edge over PPF and with raising of age by regulator to 70 and maturity to 75, NPS becomes all the more lucrative!