Understand the difference between NPS, PPF and EPF

When it comes to investments for the long term or retirement, investors in India have many investment options for planning their financial goals. In this article, we discuss some of the most popular investments which individuals can opt for meeting their financial needs & requirements. Each of these investments have different attributes which makes them suitable for different kinds of investors. Let’s have a look at the offerings of the National Pension Scheme (NPS), Public Provident Fund (PPF) & Employees Provident Fund (EPF).

Full Comparison of NPS vs PPF vs EPF

National Pension Scheme (NPS)

National Pension System (NPS) is a saving & retirement scheme launched by the Government of India in 2004. This scheme is supervised by the Pension Fund Regulatory and Development Authority (PFRDA). The objective of the scheme is to provide a systematic architecture of savings & investments for Indian citizens to plan their retirement needs.

It was first introduced for government employees in January 2004 and later in 2009, the scheme was made available for a larger segment of the population. Under this scheme, the investors need to make contributions into the NPS account every year till their retirement. The contributions are then invested in market securities to generate returns on investment.

At retirement, the subscribers can make a lump-sum withdrawal of up to 60% of their corpus and the rest 40% of the corpus needs to be used for buying an annuity scheme from an approved annuity provider which will offer regular pension to the account holders.

Features of NPS

Investment options

The NPS scheme makes investments in different assets like equity, corporate bonds, government bonds, REITs & InVITs. The scheme offers two investment choices:

- Active Choice - In this option, the subscriber can decide the asset allocation of the NPS account as per his risk appetite & financial requirements subject to certain limits.

- Auto Choice - In this option, the subscriber doesn't need to decide on asset allocation rather a lifecycle-based approach is used which makes automatic allocation depending upon the age of the subscriber.

Investors have to choose the suitable option for their NPS account's asset allocation. Otherwise, an Auto choice option is selected by default.

Contributions

The minimum amount required to open the NPS Tier-1 account is Rs.500. And the minimum amount of contributions required in a financial year is Rs.1,000. The account holder needs to make at least 1 transaction every year to keep the account active.

Liquidity

The NPS scheme offers two types of accounts i.e. Tier-1 & Tier 2 accounts. The Tier-1 account comes with a lock-in till retirement. This account does not allow withdrawals until retirement.

Tier-2 account is a highly liquid account as it allows withdrawals at any time as per the needs & requirements of investors.

Flexibility

The NPS account offers high flexibility to subscribers for choosing the fund manager and investment preferences. The subscriber can easily switch between the investment choices i.e Active & Auto choice. Similarly, if the subscriber is not satisfied with the performance of the PF manager's performance then he/she can switch to another manager.

Public Provident Fund (PPF)

Public Provident Fund is a post office savings scheme which is backed by the Government of India. The PPF account can be opened in any branch of the post office or authorized commercial banks. The scheme has a long tenure of 15 years which can be extended by 5 more years. It is considered a very safe mode of investment because of the sovereign guarantee of the Indian Government on the contributions & returns. The investors need to make deposits via lump sum or installments into the account every financial year till maturity.

At maturity, the investors will be entitled to receive the entire accumulated corpus along with the interest earned on investment over the period.

Features of PPF

Loan facility

The PPF account offers the facility to avail loans against investments. Loans can only be availed from the third financial year to the end of the sixth year. The maximum loan amount under this facility is 25% of the account balance left in the account in the preceding year to the financial year in which application for a loan has been made. The applicable interest rate charged on a PPF loan is 1%.

Eligibility criteria

Any Indian citizen is eligible to open a PPF account. The account can also be opened by parents/guardians on behalf of the minors.

Very Low-risk Investment

The PPF account has very low or almost negligible risk because of the sovereign guarantee of the government on its interest payments & principal invested.

Investment Limits

The minimum amount required to make investments in a PPF account is Rs.500 in a financial year. The upper limit of investments has been set at a maximum of Rs.1.5 lakh in a financial year.

Premature Exit Facility

A premature exit from the PPF account is allowed after the completion of 5 years only for meeting specific needs like for treatment of self or family members, higher education of child, etc. Also, an interest rate of 1% will be deducted from the applicable interest rate for availing premature exit facility.

Employees’ Provident Fund (EPF)

Employees' Provident Fund (EPF) is an investment scheme proposed under the Employees’ Provident Funds and Miscellaneous Act, 1952. The scheme is administered by the Central Board of Trustees (CBT) which is assisted by the Employees' Provident Fund Organization (EPFO). The Indian Government has made it mandatory for the employees of a company with more than 20 employees to open an EPF account if their salary is less than Rs.15,000 per month.

Under this scheme, the employee has to contribute 12% of their basic salary every month into the EPF account. In addition, the employer will also contribute an equal amount every month into the employee's EPF account. The employee would then be entitled to receive the entire corpus at the age of 58 years along with the interest earned on the account.

Features of EPF -

Interest Rates

The rate of interest on an EPF account is currently 8.50%. Interest earned on the account is directly credited to the EPF account on an annual basis. It is subject to annual revisions by the CBT & EPFO under the supervision of the finance ministry.

Contributions/Investment

The employees need to contribute 12% of their basic salary every month into the EPF account. And the same contribution is made by the employer.

Liquidity

The EPF scheme is an illiquid investment as withdrawals are only allowed in specific situations like for higher education, marriage, buying a house, etc.

Emergency Corpus

The EPF scheme allows individuals to build an emergency corpus that can be used for meeting urgent financial needs like medical emergencies, unemployment, etc.

Flexibility

In case of change in employment, the EPF account can be easily transferred from one office to another through the Universal Account Number(UAN).

NPS vs PPF vs EPF

Parameters	National Pension Scheme (NPS)	Public Provident Fund (PPF)	Employees Provident Fund (EPF)
Investment Tenure	Till Retirement	15 Years with an option to extend for 5 years	Till Retirement
Returns	8-10% (expected)	7.10% (currently)	8.50% (2019-20)
Partial Withdrawals	Allowed up to 25% of the corpus after completion of 3 years.	Allowed after completion of 5 years from the date of opening of the account. Only 1 partial withdrawal is permitted every year.	Allowed after 5 years for meeting certain expenses. Also allowed in case of unemployment for more than 1 month.
Withdrawals at maturity	Allows a lump sum withdrawal of up to 60% of corpus & 40% needs to be used for buying an annuity scheme.	Lump-Sum Withdrawal at maturity.	Lump-Sum withdrawal.
Tax Benefits	EEE- Exempt in terms of taxation. Tax deductions under Section 80CCD, 80CCD(1B) & 80CCD(2).	EEE- Exempt in terms of taxation. Contributions, interest earned & maturity proceeds are exempt from taxes.	EPF also falls under the EEE-Exempt category in terms of taxation. No tax benefits on withdrawals made before 5 years.

Where should you invest- NPS, PPF, or EPF?

All these investment schemes are considered very good options for long term investments. Investors can choose the investments as per their financial needs, risk appetite, return expectations & other requirements. The National Pension Scheme has the potential to offer higher returns among these schemes. At the same time, risks are also higher as investments are made in market-linked securities like equity, corporate bonds, government bonds, etc.

Employees' Provident Fund is considered to be very safe as the contributions are handled by EPFO. Investors looking for very low-risk returns can consider EPF for their retirement needs and investors who have a low to moderate risk appetite could consider making contributions into the NPS account for their retirement needs.

Investors can also consider the PPF account for their retirement or financial needs if it fits their requirements of investment tenure & limits.

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