EPF Vs NPS Vs PPF – Which is better investment option?
This post is based on request from Vikas to write about EPF Vs NPS Vs PPF on suggest a topic. Provident fund or pension schemes provide good security with stable returns and they are one of the best retirement options. New Pension Scheme (NPS) / National Pension Scheme, Employee provident fund (EPF) and Public Provident Fund (PPF) schemes are some of the pension and provident fund schemes where individuals can save money for retirement. However their unique features would help individuals to take a decision as to where to invest. In this article we would discuss about EPF Vs NPS Vs PPF, their features and which is a better option.
What is New Pension Scheme (NPS) / National Pension Scheme
NPS is a good retirement scheme for employees of Government and private employees. NPS can be taken by all citizens of India. NPS is available in 3 approaches. Tier-I, Tier-II and Swavalamban Scheme. NPS was already available for government employees and it is extended to other citizens of India w.e.f. 1-May-2009.
Tier-I: You cannot withdraw the amount up to retirement. Government employees have to mandatorily invest 10% of their salary into NPS Tier-1 account. Tier-1 account is mandatory to open for Tier-2 account.
Tier-II account: You can invest and freely withdraw money from this Tier-II account. Minimum contribution is Rs 1000 during registration and Rs 2000 for the entire year. You can contribute for a minimum of 4 contributions per year.
Swavalamban account: This type of NPS is provided for encouraging poor workers. Under this scheme, Govt of India would pay Rs 1,000 per year for the first 4 years as its contribution. However there are several conditions attached to this.
What is an Employee Provident Fund (EPF)?
EPF is for salaried employees where the employer and employee would contribute to 12% of basic + DA each into this provident fund account. This would generate interest of 8%+ per annum till the retirement age.
What is Public Provident Fund (PPF)?
PPF is a government scheme meant for un-organized sector / non-salaried employees. Anyone can contribute to PPF account and get safe and assured returns. PPF currently has a higher rate of interest compared to EPF interest rates.
EPF Vs NPS Vs PPF
Now, let us see the difference between these 3 schemes.
1) Who can open the account (EPF Vs NPS Vs PPF)
EPF can be opened only by salaried employees in India. On the other side, NPS and PPF can be opened by any Indian. NRI’s cannot open a PPF account.
2) Interest rates (EPF, NPS and PPF):
- The EPF interest rate for FY2012-13 was 8.5% per annum.
- The NPS does not carry any specific interest rates as they invest in various investment options. For FY 2012-13, NPS schemes earned between 12% to 14% interest rates based on the scheme chosen by an individual. In future it is expected that it may not earn similar interest rates, but the interest would be higher compared to other options.
- On the other hand, the PPF interest rate for FY2012-13 was 8.8% per annum. Among all these options NPS scores high in terms of interest.
However interest rates on provident fund schemes would be decided by the Govt. of India every year.
3) Tax Benefit (EPF Vs NPS Vs PPF):
The amount invested in these 3 schemes are exempted from tax under section 80C up to Rs 1 lakh.
4) Period of investment (EPF or NPS or PPF):
- EPF account would be active till retirement or when an individual resigns from the organization whichever is earlier. Transfer from one company to another company can be done for EPF.
- The NPS account would also be active till retirement of 60 years. However you can withdraw the money up to 20% only before retirement. Hence this is not a liquid investment.
- On the other side, PPF account is opened for 15 year period. You can extend this account for another 5 years upon maturity.
5) Loan option (EPF Vs NPS Vs PPF):
- For EPF, you can apply for a loan and withdraw your investment to a maximum extent. It is a somewhat liquid investment option.
- For NPS, you do not have any loan option.
- PPF on the other hand, you can withdraw only 50% of the balance available at the end of 4th year upon 6th year onwards. Means you cannot withdraw full or maximum extent.
6) Employer contribution (EPF Vs NPS Vs PPF):
- For EPF, the employer has an obligation to contribute 12% of basic + DA. Means this would straight away add to your retirement savings.
- For NPS or PPF there is no such employer obligation to contribute.
7) Mandatory savings from employee (EPF Vs NPS Vs PPF):
- For EPF, the employee has to do 12% contribution on basic and DA per month.
- However for NPS or PPF there are no such mandatory savings.
- However if they open any such account, they need to invest minimum investment required to keep the account open.
8) Taxation of maturity returns (EPF / NPS / PPF):
- Maturity returns from EPF are tax free provided if an employee is in continuous service for 5+ years. If the employee has quit before 5 years and needs maturity amount, it would attract tax.
- Interest on NPS is taxable.
- On the other hand, returns from PPF are tax free.
9) Scheme Style (EPF, NPS and PPF)
EPF and NPS are more designed to get regular pension after retirement. PPF on other hand is good option to accumulate amount for retirement.
Conclusion on where to invest:
- If you are salaried employee, you would not have a choice about EPF as this is a mandatory provident fund scheme.
- However if you are salaried or non-salaried employee or look for high returns for retirement savings without liquidity option, you can contribute to New Pension Scheme (NPS) / National Pension Scheme to enjoy high returns. Last year returns are even comparable with what we get for equity mutual funds.
- If you want to invest in liquid investments or for tenure of 15 years only, invest in PPF.
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EPF Vs NPS Vs PPF – Which is better investment option
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