Why NPS is the best retirement option compared to EPF and PPF?

Why NPS is best retirement option compared to EPF and PPFWhy NPS is the best retirement option compared to EPF and PPF?


This budget of 2015-16 has given additional tax benefit of ₹ 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?

Also Read: EPF Vs VPF Vs PPF – Which is a good saving scheme?

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 ₹ 1000 during registration and ₹ 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 ₹ 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.

You may also like: Complete guide on New Pension Scheme /National Pension Scheme (NPS) in India?

3) Tax Benefit (NPS Vs EPF Vs PPF)


The amount invested in these 3 schemes is exempted from tax under section 80C up to ₹ 1.5 lakhs. However, effective from 1-Apr-2015, additional tax benefit of ₹ 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.

Also Read: What is Public Provident Fund and how you can get maximum interest out of it?

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 ₹ 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 ₹ 68 Lakhs (8.5% interest rate) and maturity amount is ₹ 2.01 Crores approx. This is tax free.

PPF – Total investment amount ₹ 68 Lakhs (8.5% returns) and maturity amount is ₹ 2 Crores approx. This is tax free.

NPS – Total investment amount ₹ 68 Lakhs (12.5% returns) and maturity amount is ₹ 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 ₹ 4.3 Crores. As you need to buy annuity for pension fund at 40% at retirement, you would be left out with ₹ 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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Suresh
Why NPS is the best retirement option compared to EPF and PPF

Suresh KP

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71 comments

  1. 12.5% returns in every financial year upto 30 yrs not possible..IMO after 2025 the rate of returns may fall below 8%

    NPS very risky one for non govt staff

  2. Hi Suresh, 40% annuity is fixed? if the we buy annuity for 40% in the corpus, How much pension we will get? and for how many years?

    1. It is written that there is annual increase of 8% in the contribution. So, take in account the 8% increase compounded annually to the 5000.

  3. If I am lay man and I didn’t have much idea on the stock market, how I will decided on the NPS scheme, in which fund I need to invest ?

    1. It depends on your risk appetite and age. If you are at young age of middle age of below 40, go for equity option. Otherwise, you can move to debt option

  4. Hi Suresh,
    Thanks for nice article. But I didn’t understand about the annuity. what do you mean by buying annuity of 40%? can I withdraw remaining 60% as lumpsum after buying ? and what will be monthly pension amount a person may get as per calculation?

    1. IF your accumulated amount is say Rs 1 Lakhs. You need to buy annuity for 40% i.e. Rs 40,000. Means this amt is kept by insurance company and they pay fixed monthly income to you as pension amount.

  5. Hi Suresh, thank you very much for your articles, highly informative. With regards to NPS, since the returns are market based, if the market tanks, then one would incur loss rather than assured returns of EPF and PPF, am I right? Thanks again. Also could you please opine about FundsIndia. I’m looking for a platform from where I could invest in different mutual funds. How much do they charge (they haven’t mentioned about charges on their website) and how safe is it to use that service? Is there an alternative?

  6. Thank You Suresh. Was really Informative!! I was confused on whether to invest on NPS or PPF. But now I prefer NPS and planning to go ahead with it. Please let me know if I invest from next month to NPS will I get the tax exemptions in this year’s taxation? Thanks once again for the information provided.

  7. Your calculations are wrong.
    If you invest 5000 per month with 8.5% interest per month, after 30 years, Maturity Amount is Rs 8210798 and invested amount is Rs 18,00,000.
    Please dont do wrong calculations and fool people. Also, when interest is 4.2 crores, then 30% would be deducted as tax and not 10%.

    1. Aashi, Point no.1 – I indicated 8% increase in investment value. Means Rs 5,000 per month would be invested for 1 year and Rs 5400 per month would be invested from 2nd year onwards and it would be increased year on year. Looks you are making statements without even looking what I am saying. Point no.2 Maturity amount of NPS would be taxable as per indexation method. I have assumed that we need to pay entire 10%. It could be even less. Why we need to pay 30% on indexation method? Which tax rule you are referring? Don’t just criticise without knowing fundamentals of taxation.

  8. How do you calculate 4.7cr returns in case of NPS?
    is it guaranteed?
    I think its risk based investment.
    -Raj

  9. Hello Sir,
    please distinguish between NPS and AYP. As Swavalamban account is converted into AYP so does that affect the existence of Tier 1 and tier 2 in NPS . If not than can we invest in NPS ?how can we invest in nps ?

  10. H suresh ji,
    As NPS investment are being invested in Equities(50%). I want to invest in SIP (Rs10000/month). but, as u have mentioned in earliar article, for every transaction charge will be Rs 500. so is it better to invest Lumpsum (1.2Lakhs/year) ? please guide me which is good for better returns?

    1. SIP is available in Mutual funds. In NPS, you can invest every month. You can check with banks about transaction charge. I am not able to recall any transaction charge of Rs 500 indicated by me earlier.

  11. Hello Suresh ji

    I m reading ur articles from past 15 days and these are very useful. This article about budget 2015 is very useful & informative. It has cleared my confusion regarding NPS contribution exemption limit declared in budget 2015 as i has asked many people.

    My query is regarding NPS. I am state govt. employee & i have a NPS a/c as it is mandatory for govt. sector employees. My NPS Tier -I a/c is active.

    i want ur opinion regarding activation of Tier-II a/c as tax limit for NPS contribution has been raised as mentioned by u. Should i invest in NPS or in M/f’s. plz suggest.

  12. Hello Suresh Ji

    I want to know that increase of Rs.50000/- contribution to NPS in 2015-16 budget effective from 1-April-2015 is over and above the saving of Rs.1,50,000/-.

  13. Hello Suresh,

    i have gone through above article is good but i have a question on last few lines which you calculated Rupees 5000/Month for 30 Years how can we get 2.1 Core with 8.5% interest rate. when i calculated i am getting only 82 Lakhs after 30 years. can you share me what is the formula using for above EPF, PPF, NPS you are using. Thanks

  14. Suresh ji, very nice and informative article.
    Pls clear my doubt- 5k per month for 30 yrs will be 18L Total.
    How come 68L?
    In PPF @1.50 L for 15 yrs – Total investment wud be Rs.22.50L – What is this fig of 68L?
    Looking into the calculation NPS IS BEST – but unable to understand the calculation.
    I m investing 1.50 in PPF – do u suggest to divert it to NPS?
    Pls guide.

  15. Thanks for the reply. I saw it. i have another clarification. Apart from EPF we are contributing to fund called Employee Pension Scheme (previously it was 541 max now increased to 1250). That amount can be earned as pension only after age of 58. Can we just divert that amount to NPS and keep the other contribution with EPF? Apart from that my employer provides seperate option to choose NPS apart from Normal PF contribution. So far i haven’t invested on that. Shall I opt both EPF and NPS?

  16. Hi Suresh,

    I am working for an It company ,and every month out of my 30K salary , And my EPF contribution is 1114 per month,So please advice me , can i invest in NPS and also how much i can invest on NPS to get atleast around 50 lakhs during my retirement.

  17. I first of all, apologize for such a query. But, i have added my query on 28th march, as below, but it was not replied for almost 10 days. So only, i had a doubt. Now you have rectified my query in an earlier comment in this section. I have one more doubt. In your Post “Budget 2015”, you have not mentioned anything about the 80U change. Actually, i am a disabled person, and i would be looking towards such a section change. So, can you please comment about the change in Section 80U and 80DD.

  18. Hi Suresh, What is the maximum amount that one can invest in Tier 1 as also Tier 2 of NPS? As pension fund manager please suggest whom should I choose – I was thinking of SBI . Please suggest. I am thinking of opening the NPS account very soon. Kind regards.

  19. hi suresh, i always read ur articles before investing. it is very nicely written. i have 1 query, regarding tax exemption limit. i invest 150000 every year in ppf account, so can i invest 50000 in nps now. As i come in 20% tax bracket. does it benefit me?

  20. Hi Suresh,

    on April 1st (yesteraday around 8.45 AM) i deposited 20k to PPF account via Axisbank.
    But when i see the deposit date via Axis netbanking, it reflected as 31st March as 10k. i’m confused over here.
    Please help me to sort out this. i cant show under this finanacial year.

  21. Hi Suresh, informative article. Thanks! I am working in a private company, so can I jut go to a bank and open NPS account or do I need to ask my employer for it?

  22. Dear Mr.Suresh,
    Returns out of NPS would be hIgher in case of young investors.But for thosewho aree in late 40’s and above , I think PPF is a better option compared to NPS. What do you say?

    1. DS Rao, No. If you are 40’s, you can invest for another 18-20 years. This is enough to get good returns. If you are investing for < 10 years, there are chances that you would get less returns.

  23. Dear Suresh…I see a disadvantage on this NPS. I could not withdraw the full amount while retirement. Part of amount must be contributed to Pension scheme but those offer only very less returns as pension. Hope this is an Disadvantage as per me. Please throw some light on this

    1. I agree. Hence if you see, I have reduced 40% of NPS maturity amount and then compared the balance of 60% with PPF / EPF returns. Hence this scores high. Re-check my article and give your valueble inputs

  24. Thanks for such a great article !!
    I have a query regarding NPS. What is the maximum amount that can be invested each year ? Are there separate limits for Tier I, II etc ?
    Regards

  25. Hi Suresh,

    May i know, why my questions are not answered and being removed from the site for the past few months?

    Regards,
    Vignesh. S

    1. Vignesh, I generally do not delete any comment. Sometimes due to paucity of time, I would just approve without responding. Pls let me know your query

  26. Hi Suresh,

    In your example given about NPS, I understand that we will have to buy annuity with 40% amount accumulated in the PRAN that is about 1.7 crores, what will be the monthly pension amount that one will get?

    Also, what if the person dies after buying annuity?

  27. Hi Suresh,

    I have a doubt here, You have mentioned 1 Lac for 80C Limit. But it is 1.5 Lac now right.

    So, NPS would provide additonal 50,000 for deduction under 80CCD.

    So, will the total deduction of Income under incometax will be 2 Lac?

    I am paying a sum of Rs. 1.5 Lac on other Terms like EPF, Insurance etc. So, if i invest 50000 per year on NPS, will i be still getting 2 Lac deduction per year?

    Regards,
    Vignesh. S

  28. Hi Suresh,
    A very informative article. However, don’t you feel the same amount (say 5000 per month for 30 years) in a diversified equity mutual fund would provide much better and higher returns than NPS? That too tax free.
    I’m not against NPS but I feel the EET thing (taxable at maturity withdrawal) along with the mandatory annuity to be payed in NPS is its biggest disadvantage. We never know how much annuity pension would be provided by NPS 30 years down the line and whether it would be enough to keep pace with the cost of living at that point of time.
    There is no such hassles in equity mutual funds. Over long term, the risk associated with equity is also less.
    Just my views.

    Thanks and Regards,
    Anand,

    1. Anand, I agree. But you are comparing 2 different category of investmenst. MF are risk investment options. NPS is low risk investment option. Hence I compared NPS with EPF and PPF.

  29. Dear Mr. Suresh,

    I regularly visit your blogs and like your Articles. But this time a disagree with your views mentioned above.
    It could have been better if you consider the following points:

    1) The Equity part of NPS is limited to just 50 %, 30 % and 10 % depend on the age of 35 Yrs, 45 Yrs or 55 Yrs.

    2) The rate of return that you have assumed on NPS is not mentioned but it seems that you took if more than 13 % which is very unrealistic as the exposure to the equity in NPS is limited and has to be considered accordingly. I don’t see more than 8 % return on the debt part.

    3) The taxation part of the Maturity amount is not clear, as I believe that the maturity amount will be taxed on 30 % rate in most cases (As per the Tax Slab applicable)

    4) I think that we should not compare between (EPF or PPF) Vs NPS but the real comparision should be between Other Equity Linked Schemes Vs NPS where NPS is always on back foot.

    If we consider these points, we will definitely find out the Better Option.

    Regards
    Manish Jha

    1. Manish, Thanks for your valuable inputs 1) I agree 2) Yes, I have considered 12.5% returns from NPS (which has already been given by existing NPS funds since inception 3) Maturity is taxable 4) I cannot compare NPS with mutual fund as both are different category of investments. We can compare with pension / small saving schemes / retirement investment options. Yes there could not be fool proof guide to compare with only specific options. Finally, I take your point about equity linked schemes vs NPS, among them ELSS would score high. However since there is element of risk in mutual funds / ELSS schemes, I compared apple to apples. 

  30. Hii Suresh.Very nice article as always.Just have a confusion-in point no 3)under Tax benefits- You mentioned the amount exempted under 3 schemes is 1lakh.This should be 1.5 lakh.So the question is if I invest 1.5 lakh in PPF & 50k in NPS ,then will I get 2 lakh tax exemption?

  31. Nice article.
    If I invest rs 1.5 lac in ppf and 50,000 in NPS. Will I get tax benefit of 50,000 over n above 1.5 lac?

    Is there any chances that in subsequent years govt may qualify for EEE for nps just like ppf?

  32. Dear Sureshji, Nice articles. Can you kindly confirm whether should I invest in tier 1 or tier 2 for getting Rs.50000 benefit?

  33. Hi Suresh,

    Good article and great comparison.

    I have a quick question. While comparing the maturity amount of the investment at the end of the article you mentioned as 4.3 crores for NPS after tax, but i dont understand what does it mean by “buying annuity for pension fund at 40%”? What happens to this 40% of amount? Does this amount cannot be received by the person?

    Thanks,
    Uday

  34. Dear Suresh, very nicely written article. How will you compare it with taxfree bonds and when do you expect them to come out. I just want to add that under Sec 80C max amount one can invest in PPF is also 1.5 lac.

    1. Anil, Tax free bonds are being issued now and then which carry between 8.0% to 8.75% (last few tax free bonds). Tax free bonds would not give you 80c benefit. Returns from such bonds are tax free. If you want tax benefit 80c, invest in tax free investment options like PPF, NSC, Tax saving bank FD schemes etc.,

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