Battle for retirement savings: NPS vs PPF vs EPF. Which is the best option?

You can save up to Rs. 1.5 lakh per year in NPS and get a tax deduction under Section 80C. NPS also offers an additional tax deduction of up to Rs. 50,000 per year

For many Indians planning their retirement, choosing the right investment option can be confusing. Traditionally, Public Provident Fund (PPF) and Employees' Provident Fund (EPF) were the go-to options. However, the National Pension Scheme (NPS), launched in 2009 for the general public, has emerged as a strong contender.

Here's a breakdown of each option and why NPS might be the new champion:

National Pension Scheme (NPS): NPS is a government-sponsored pension scheme that aims to provide income security during retirement. It offers the flexibility to choose between equity, corporate bonds, and government securities as investment options. NPS provides tax benefits under Section 80C and Section 80CCD of the Income Tax Act. 

Public Provident Fund (PPF): PPF is the government's long-term investment scheme. It provides fixed returns and has a maturity period of 15 years. PPF contributions are eligible for tax deductions under Section 80C. PPF accounts also have the advantage of being partially withdrawable after the completion of the fifth year, making it a more liquid option.

Employee Provident Fund (EPF): EPF is a retirement benefit scheme widely utilised by salaried individuals. It offers a fixed interest rate and contributions made by both the employee and employer. EPF contributions are eligible for tax deductions under Section 80C. EPF allows partial withdrawals for specific purposes like education, housing, or medical emergencies. 

History: PPF and EPF have been around for a long time, offering stability and familiarity. NPS is newer but has gained significant traction in recent years.

Returns:  Here's where NPS shines. It allows investment in equity (stocks), which can potentially generate higher returns over the long term compared to the fixed interest rates offered by PPF and EPF.

Performance:  Studies show that even the most conservative NPS option (with 25% equity allocation) has historically outperformed PPF and EPF over the past 15 years.

Why Equity Matters for Retirement:

Equity investments carry some risk, but that risk tends to decrease over longer time horizons like retirement savings. Including some equity in your portfolio helps your savings grow faster to combat inflation and build a larger retirement corpus.

So, is NPS the clear winner? Not necessarily. Each option has its own features and benefits:

PPF: Offers guaranteed returns, tax benefits, and partial withdrawal options. Good for those seeking stability and low risk.

EPF:  Automatically deducted from your salary if you're a salaried employee. Offers guaranteed returns and tax benefits.

NPS: Offers potentially higher returns due to equity options, additional tax benefits, and flexibility in choosing your investment mix. However, it comes with some market risk and limited withdrawal options before retirement.

On top of its impressive long-term returns, the NPS offers two distinct advantages that further cement its position as a compelling retirement investment option. Value Research explains the following:

 Additional tax benefits: Investors can claim an extra tax deduction of up to Rs 50,000 under Section 80 CCD (1B). This is over and above the Rs 1.5 lakh tax deduction that's already available with PPF and EPF. 

Automatic rebalancing: The NPS offers a unique feature of tax-free automatic portfolio rebalancing on birthdays. This ensures that your asset allocation remains within your predefined limits. What's more, buying and selling independent equity and debt investments levy certain taxes, but not in their case.

Are there any downsides to the NPS? 

"It's their withdrawal policy that mandates 40 per cent of the corpus to be used to buy an annuity plan for regular income during retirement. The remaining 60 per cent can be withdrawn lump sum or in a phased manner, upon retirement.All said, the strict withdrawal policy is a blessing in disguise for many investors, especially those who are generous with their money and lack discipline. Ultimately, it will help subscribers amass a considerable warchest for their sunset years," said Pankaj Nakade of Value Research.

Let's imagine you're 30 years old and just starting to think about retirement, which might seem far away, but planning early is key! Here's why NPS could be a good fit for you compared to PPF and EPF:

Growing your nest egg:

Think long term: Retirement is typically 30-40 years away for you. NPS allows you to invest a portion of your money in stocks (equity). Stocks can be risky in the short term, but over long periods like your retirement timeline, they tend to grow more than fixed deposits or bonds (like PPF and EPF).

Example: Imagine you invest Rs. 1 lakh every year. Here's a simplified scenario (actual returns will vary):

PPF/EPF (fixed returns): You might earn around 7-8  per ent interest, so after 30 years, you'd have around Rs 94 lakh (assuming interest is compounded annually).
 

NPS (with equity): Say the NPS option you choose averages 10% return (including equity growth). After 30 years, you could potentially have Rs  3.43 crore (compounded annually).

That's a significant difference! With NPS, you have the potential to build a much larger retirement corpus.

NPS gives you some control: You can choose how much equity you want in your NPS investment (25%, 50%, or 75%). This allows you to balance risk and potential reward based on your comfort level.