Why NPS is the best retirement option compared to EPF and PPF?
This budget of 2015-16 has given additional tax benefit of Rs 50,000 per annum for NPS (New Pension Scheme/National Pension Scheme) from 1-Apr-2015. There is so much confusion whether NPS is better investment option compared to other retirement options like EPF and PPF. Provident fund schemes provide good security with stable returns and they are one of the best retirement options. New Pension Scheme (NPS), 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. While additional tax benefit of NPS is attracting investors, reviewing features of all such saving schemes would help individuals to take a decision as to where to invest. In this article we would discuss about NPS Vs EPF Vs PPF, their features and which is a better option. Is NPS is the best retirement option compared to EPF and PPF?
What is New Pension Scheme / National pension Scheme (NPS)?
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. The 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. The 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.
Comparison of NPS Vs EPF Vs PPF
Here is the quick comparison of the features of these 3 schemes.
1) Who can open the account (NPS Vs EPF 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. NPS and PPF can be opened with any post office or authorized banks in India.
2) Interest rates / Returns (NPS Vs EPF Vs PPF)
- The EPF interest rate for FY2014-15 was 8.75% per annum.
- The NPS does not carry any specific interest rates as they invest in various investment options. For FY 2014-15 (9 months period), NPS schemes earned between 18.9% to 20.9% SIP returns based on the scheme chosen by an individual. Since inception (May-2009), they have given SIP returns of 10% to 12.5%. (Source ET)
- On the other hand, the PPF interest rate for FY2014-15 was 8.7% per annum. Among all these options NPS scores high in terms of returns.
However, interest rates on provident fund schemes would be decided by the Govt. of India every year.
3) Tax Benefit (NPS Vs EPF Vs PPF)
The amount invested in these 3 schemes is exempted from tax under section 80C up to Rs 1.5 lakhs. However, effective from 1-Apr-2015, additional tax benefit of Rs 50,000 is available for NPS u/s 80CCD (1b). NPS scores high regarding tax benefit.
4) Period of investment (NPS Vs EPF Vs 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. However one need to pay 40% as annuity where one would get life long pension.
- 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 (NPS Vs EPF 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 (NPS Vs EPF 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.
- These days, employers are providing NPS as one of the tax saving option to their employees by investing some amount and making it part of CTC. Though there is a corporate NPS scheme, it is not mandatory that employers should provide it to employees.
- PPF, there is no such employer obligation to contribute.
7) Maturity returns – Taxation (NPS Vs EPF Vs 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 based on indexation method.
- On the other hand, returns from PPF are tax free.
Why NPS is better retirement option compared to EPF and PPF?
I like Dhirendra Kumar’s (Value Research Online) views in one of his article on Economic Times, with simple computation on how NPS is better. I have modified these computations to give better picture.
If you invest Rs 5,000 per month for 30 years with a 8 % increase in investment amount year on year, at 60 years of age (30 years of investment, your maturity amount would be as follows:
EPF – Total investment amount Rs 68 Lakhs (8.5% interest rate) and maturity amount is Rs 2.01 Crores approx. This is tax free.
PPF – Total investment amount Rs 68 Lakhs (8.5% returns) and maturity amount is Rs 2 Crores approx. This is tax free.
NPS – Total investment amount Rs 68 Lakhs (12.5% returns) and maturity amount is Rs 4.7 Crores approx. This is taxable based on indexation method. Assume that you still need to pay 10% tax, you would still get approx Rs 4.3 Crores. As you need to buy annuity for pension fund at 40% at retirement, you would be left out with Rs 2.6 Crores of corpus at retirement after tax and after buying annuity pension fund.
Comparing with features and high returns, NPS would score high and can be considered as one of the best retirement options under the current scenario.
Readers, what is your view on NPS and do you thin that this is one of the best retirement options in current scenario?
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Why NPS is the best retirement option compared to EPF and PPF