NPS is the best retirement option compared to EPF & PPF

NPS is the best retirement option compared to EPF & PPF

NPS is the best retirement option:

  • One of the cheapest pension products: – NPS charges just 0.25% as fund management fee making it one of the cheapest pension products in the world. Mutual funds can charge up to 2.25% and life insurers can charge up to 1.35%.
  • Choice of fund managers: – Private sector NPS subscribers have the choice of 6 fund managers and they are allowed to switch from one to another giving them the option of choosing the best fund manager. Also, the number of fund managers can increase in future as the restriction on the number of fund managers has been removed and anybody can now apply for this role.
  • Asset allocation flexibility: – Private sector NPS subscribers are given the freedom to decide their asset allocation depending on the risk they can bear. Although exposure to equity investment has been restricted at max 50% thus limiting probable chances of higher return, it appears sensible for a retirement product. The availability of Auto choice or Life Cycle Fund comes as a big positive for those who do not want the asset allocation decision headache. The automatic rejigging of the asset allocation in the auto-choice option is a unique feature of the NPS.
  • Tax advantages: – The product comes with tax saving options under Section 80C as contribution to NPS is tax deductible subject to the Rs. 1 lakh limit. Further, under Section 80CCE, employer’s contribution to the extent of 10% of basic plus DA is tax deductible for the employee over and above the Rs. 1 lakh 80C limit, and also for the employer as it can be shown as a business expense. It is a win-win situation as the employer and the employees both benefit from the NPS and this can be done by merely restructuring the Cost to Company without incurring additional cost.
  • Withdrawal facility: – The addition of Tier II account in December 2009 was a welcome move as it allowed unrestricted withdrawal.

What is NPS?

New Pension System is a voluntary contribution of funds for a sustained period of time (till the age of 60years) to enable him to draw pension after he attains 60 years of age. The Scheme has been introduced by the Government of India and monitored by the Pension Fund Regulatory and Development Authority.

What are the benefits of NPS?

It is basically for people who do not have the benefit of pension after retirement from service. The scheme gives an opportunity to the subscriber to build up his pension fund over a long period so that after retirement he can draw pension for his sustenance.

What is TierI and TierII ?

Tier I is the primary account which the subscriber has to open to be able to open Tier II account.

What is the difference between Tier I and Tier II?

In Tier I no withdrawal can be made till the subscriber reaches 60years of age, in Tier II the subscriber can withdraw from his balance anytime he wishes to withdraw.

What is an Employee Provident Fund (EPF)?

Employee Provident Fund (EPF) is implemented by the Employees Provident Fund Organisation (EPFO) of India. An establishment with 20 or more workers working in any one of the 180+ industries should register with EPFO. Typically 12% of the Basic, DA, and cash value of food allowances has to be contributed to the EPF account.

What is an Public Provident Fund (PPF)?

PPF refers to Public Provident Fund and is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid. Any Individual (whether Salaried or Self-Employed or any other category) can invest in this scheme and can earn a handsome tax-free return on the same which is usually higher than the return offered by Banks on Fixed Deposits.

Also see Income tax calculator for Financial year 2014-2015

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 FY 2014-15 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 FY 2014-15 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 lakh. 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.

EPF, PPF or NPS: Which is the best savings scheme for you?

EPF (Employee Provident Fund) and PPF (Public Provident Fund) have been the most talked about investment products/savings schemes in the past decade. The reasons could be many — tax-free returns, tax deduction for invested amount, fixed returns and so on.

There is another product which has joined this duel and made it a triangular contest.

The entry of NPS or New Pension Scheme has made the ‘best savings scheme’ contest really interesting.

Other Investment scheme worth investing are:

Pradhan mantri jeevan jyoti bima yojana – PMJJBY

Pradhan mantri suraksha bima yojana – PMSBY 

Atal Pension Yojana

Sukanya Samridhi