EPF vs NPS vs PPF: The foundation of a financially free retirement can be the preparation from an early stage. Starting to invest early for retirement provides you the years of compounding, helping you generate a sizeable corpus from small investments. Individuals in India have many retirement-centric schemes to build their corpus. Some of the most prominent of them are National Pension System (NPS), Employees’ Provident Fund (EPF), and Public Provident Fund (PPF). While NPS is a market-linked scheme, EPF and PPF offer a fixed interest rate to their investors.
While there are no investment limits in NPS and EPF as far as the amount is concerned, one can invest a maximum of Rs 1.50 lakh a financial year in PPF.
How large a corpus can one generate if they invest Rs 12,500 a month (Rs 1.50 lakh a financial year) in NPS, EPF, and PPF?
NPS investment
NPS is open to all Indians, including NRIs.
One can open a Tier I NPS account with a minimum investment of Rs 1,000.
There is no maximum investment limit.
One needs to deposit Rs 1,000 a financial year to continue their Tier I account.
The NPS contribution of an individual is invested in a mix of equity, corporate debt, government bonds, and alternative investment funds.
One can start investing in NPS from the age of 18.
At 60 years of age, they get the option to withdraw their corpus up to 60 per cent.
They need to purchase an annuity plan from the rest of the amount, which provides them a monthly pension.
The retirement corpus from the NPS Tier I account is tax-free.
EPF investment
EPF is a mandatory retirement scheme for employees working in organisations that are part of Employees’ Provident Fund Organisation (EPFO).
They contribute a minimum of Rs 1,800 a month to their EPF account, while their maximum contribution can be 12 per cent of their basic pay and dearness allowance (DA).
EPFO provides an 8.25 per cent interest compounded yearly. The interest rate is subject to change.
In the old tax regime, EPF investment up to Rs 1.50 lakh a financial year provides tax benefits under Section 80C of the Income Tax Act.
The interest earned and the retirement corpus are also tax-free.
PPF investment
PPF is a fixed interest rate small savings scheme that provides a 7.1 per cent rate compounded yearly.
The scheme is also open to minors.
The minimum investment allowed in the scheme is Rs 500, while the maximum is Rs 1.50 lakh in a financial year.
A PPF account has a maturity period of 15 years.
The account holder can take 5 years of unlimited extensions after that.
If they choose not to contribute, they can take only 1 such extension.
In the old tax regime, PPF contributions up to Rs 1.50 lakh a financial year provide tax benefits under Section 80C of the Income Tax Act.
The interest earned and the retirement corpus are also tax-free.
Calculations for story
We are calculating the estimated corpus created from a Rs 1,50,000 yearly contribution, or Rs 12,500 monthly contribution, to EPF, NPS, and PPF in 30 years.
For EPF, we are taking an 8.25 per cent interest rate; for PPF, it is 7.1 per cent.
For NPS, we are calculating at 75 per cent allocation to equity and 25 per cent to debt (active choice).
The expected return is 12.74 per cent.
EPF corpus at Rs 1.50 lakh/year investment for 30 years
The total investment in 30 years will be Rs 45,00,000, the estimated interest will be Rs 1,47,59,490.07, and the estimated corpus will be Rs 1,92,59,490.07.
PPF corpus at Rs 1.50 lakh/year investment for 30 years
The total investment in 30 years will be Rs 45,00,000, the estimated interest will be Rs 1,04,81,444, and the estimated corpus will be Rs 1,49,81,444.
NPS corpus at Rs 1.50 lakh/year investment for 30 years
On a total investment of Rs 45,00,000, estimated capital gains will be Rs 4,01,99,526, and the estimated corpus will be Rs 4,46,99,526.
(Disclaimer: These are projections. Actual calculations may vary.)