NPS vs PPF: Which product is better for millennials?

The number of demat accounts opened in the post-pandemic period has seen a sharp increase as it forced everyone-more so the millennials to reconsider their spending & saving habits. The work from home (WFH) model, the reduction in interest rates on deposits & the rally in equity markets helped accelerate this trend among millennials who when compared to Gen X are more adventurous & willing to experiment.

Millennials have a higher risk appetite than Gen X and don’t hesitate to invest in exotic products like cryptocurrencies. However, their bets in equities & cryptos may not pay in the long run & may not help them achieve their financial goals. Just to take the example of Bitcoins, its price has tanked from $68,000 in November 2021 to $30,000 today. It is in this context that investing in safer products like PPF or NSC makes sense for millennials.

Here’s the lowdown on NPS & PPF:

NPS launched in 2004 aims to provide steady income & security to all citizens including NRIs during their old age. Contributions made by an NRI though are subject to regulatory requirements. Individuals aged between 18 to 70 years are eligible to open the account.

NPS can be opened only in an individual capacity and cannot be opened jointly with a spouse, child, or relative. You can open two types of accounts. The first one is the Tier-I Account, which is a non-withdrawable account. The second one is the Tier-II Account which is a voluntary savings account. You are free to withdraw from this account at any time.

On the other hand, you can open a PPF account in post offices & banks. There is no minimum or maximum age limit for opening a PPF account. However, NRIs are not eligible to open a PPF.

In both PPF & NPS you can contribute a maximum of Rs 1.50 lakhs in a financial year which can be either a lump sum amount or in instalments. While the minimum amount is Rs 500 in PPF it is Rs 6,000 in NPS.

While you don’t have any control over your contributions in PPF, in NPS you can choose to allocate your investments in asset class E which invests predominantly in equity shares , asset class C which invests in corporate debt , asset class G which invests in government securities or in asset class A which invests in alternate investments like real estate investment trusts (REITs), infrastructure investment trusts (INVITs), or alternative investment funds.

You can also choose any of the eight fund managers to manage your investments in the four asset classes. While returns in NPS are not guaranteed, in PPF you will get a fixed interest rate which is 7.1% currently and is reset every quarter by the government.

If your risk appetite is high & you want a pension in your old age you should go for NPS.

Tenure & maturity

PPF has a tenure of 15 years which can be extended in blocks of 5 years by you as per your convenience. You can continue the account with or without deposits after maturity & the balance in the account will continue to earn interest applicable to the scheme. In the case of NPS, it matures when the subscriber turns 60 but he can delay withdrawing the amount till he is 70.

While you can withdraw the entire amount under PPF on maturity, you can withdraw 60% of the corpus under NPS on maturity but will have to purchase an annuity with the remaining 40%.

Tax Benefits?

You can claim a maximum benefit of Rs 1.50 lakhs per year under Sec 80C of the IT Act in both NPS & PPF. However, you can claim an additional amount of Rs 50,000 under Sec 80CCD (1B) in NPS. In all, you can claim a maximum tax benefit of Rs 2 lakhs under NPS.

Both NPS & PPF come under the triple E or exempt-exempt-exempt category which means the amount invested, interest earned & maturity amount received are exempt from tax.

All millennials should start investing in PPF & NPS as soon as they start working so that the longer the time horizon more will be the corpus as & when they decide to retire from work. The added advantage of PPF is that money lying in PPF cannot be attached by any court decree.

(The writer is a Bengaluru-based CFA)