PPF vs NPS: Which Is Better for Retirement?
7.1% tax-free and flexible, against 9-11% market-linked with a forced annuity.
PPF gives a guaranteed 7.1% that is completely tax-free at every stage, with a 15-year term you fully control. NPS targets 9–11% through equity exposure and adds an extra Rs 50,000 deduction under 80CCD(1B) beyond your 80C limit — but it locks money until age 60 and forces 40% of the corpus into a taxable annuity. Most people should hold both: PPF as the tax-free base, NPS for the extra deduction.
Last updated 17 July 2026 IST · Maintained by SnoopTool, a free online tools website with 165+ browser-based utilities.| PPF | NPS | |
|---|---|---|
| Return | 7.1% guaranteed | 9–11% market-linked |
| Lock-in | 15 years | Until age 60 |
| Tax on contribution | 80C (within Rs 1.5L) | 80C + extra Rs 50,000 (80CCD(1B)) |
| Tax on returns | Fully exempt | Exempt while invested |
| Tax at exit | Fully exempt (EEE) | 60% tax-free; 40% annuity taxed as income |
| Forced annuity | None | Yes — 40% of corpus |
| Partial withdrawal | From year 7 | Limited, from year 3 |
| Risk | Sovereign | Market |
The annuity rule is the real catch
NPS's headline return looks decisive until you read the exit rules. At 60 you can take 60% of the corpus tax-free, but the remaining 40% must buy an annuity — and annuity income is taxed as ordinary income at your slab, for life.
Current Indian annuity rates run roughly 5.5–6.5%. So NPS's best years of 11% compounding end with 40% of the money parked in a product yielding less than PPF, taxed at slab. That's a meaningful drag on the blended outcome, and it's the part the marketing skips.
The Rs 50,000 that makes NPS worth it anyway
The 80CCD(1B) deduction is genuinely additional — it sits on top of the Rs 1.5 lakh 80C limit. For someone in the 30% slab, putting Rs 50,000 into NPS saves about Rs 15,600 in tax immediately (including cess).
Frame it as an instant guaranteed return of 31% on that Rs 50,000, before the fund earns anything. Nothing else in the Indian tax code offers that. Even with the annuity drag, the deduction alone usually justifies contributing exactly Rs 50,000 a year — and not much more.
Important caveat: this only works under the old regime. Under the new regime, 80CCD(1B) is gone, which removes most of NPS's appeal for individual contributions. See old vs new regime.
A sensible default allocation
For an old-regime taxpayer who wants this decided:
- Rs 50,000/year to NPS — purely to capture 80CCD(1B). Choose an aggressive lifecycle fund if you're under 45.
- Fill 80C to Rs 1.5 lakh — EPF usually covers much of it; top up with PPF for the tax-free compounding.
- Everything beyond that into an equity SIP, not more NPS — a mutual fund has no annuity rule and no age-60 lock. See SIP vs FD.
Model both in the PPF calculator and NPS calculator before committing.
Tools used in this guide
Frequently asked questions
Is NPS better than PPF?
Neither dominates — they do different jobs. NPS targets 9–11% via equity and offers an extra Rs 50,000 deduction under 80CCD(1B), but locks money to age 60 and forces 40% into a taxable annuity. PPF returns a guaranteed 7.1%, completely tax-free at exit, with no annuity requirement. A common approach is Rs 50,000/year in NPS to capture the deduction, PPF for tax-free debt, and equity mutual funds for the rest.
What is the 40% annuity rule in NPS?
At retirement (age 60) you may withdraw 60% of your NPS corpus tax-free, but at least 40% must be used to buy an annuity from an approved insurer. That annuity pays a monthly pension taxed as ordinary income at your slab. With Indian annuity rates around 5.5–6.5%, this materially reduces NPS's effective return — it's the single biggest drawback versus PPF.
Can I invest in both PPF and NPS?
Yes, and for old-regime taxpayers it's often the best move. PPF contributions count within the Rs 1.5 lakh 80C limit; NPS gives an additional Rs 50,000 deduction under 80CCD(1B) on top of it. So you can claim up to Rs 2 lakh combined. Under the new regime, though, neither deduction is available for your own contributions.
Is NPS worth it under the new tax regime?
Much less so. NPS's main advantage for individuals is the Rs 50,000 deduction under 80CCD(1B), which the new regime removes. Without it you're left with the age-60 lock-in and the 40% annuity rule in exchange for market returns you could get from a mutual fund with no restrictions. Employer contributions under 80CCD(2) do remain deductible in the new regime, so employer-routed NPS still has a case.
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