EPF vs PPF vs NPS: Which is better for building retirement corpus?

New Delhi: People know it is very crucial to save for retirement and to achieve their target they try to build a retirement fund by investing in different schemes. A salaried employee has to invest in various scheme like Employee’ Provident Fund (EPF) or National Pension System (NPS). These options often make an investor wonder that among EPF, Public Provident Fund (PPF) or NPS, which scheme is for them. So, let’s look at the tax benefits, liquidity, and returns offered by the EPF, PPF, and NPS long-term schemes.

Employee’ Provident Fund Scheme

Employee’ Provident Fund Scheme (EPF) is available for all salaried individuals, except government employees. Both you and your employer contribute 12 per cent of your salary each month (including basic wages, dearness allowance, and retaining allowance). You can also choose to contribute up to 100per cent of your salary to the Voluntary Provident Fund (VPF).

Investment Limits

EPF is mandatory for those with a monthly salary of up to Rs 15,000. If your salary is higher, EPF is optional, depending on your employment contract.

Liquidity

You can withdraw the full amount if you retire or resign and remain unemployed for at least two months. Partial withdrawals are also allowed for specific needs like medical emergencies or marriage.

Returns

EPF offers risk-free returns. For the year 2023-24, the interest rate is 8.25per cent.

Tax Benefits

EPF contributions qualify for tax deductions under Section 80C up to Rs 1.5 lakh (not available under the new tax regime). Employer contributions up to 12per cent of your salary are not taxed.

Taxability

If the employer’s contribution exceeds Rs 7.5 lakh in a year, the excess and its income are taxable. Contributions above Rs 2.5 lakh per year are also taxable. Withdrawals before completing five years of continuous service are taxable, with some exceptions.

NATIONAL PENSION SYSTEM (NPS)

NPS is a voluntary retirement savings scheme for both salaried and non-salaried individuals, but it’s mandatory for government employees.

Choice of Investments

You must invest at least Rs 1,000 in a Tier-I account. Contributions to a Tier-II account are optional and can be made in multiples of Rs 250. Tier-I has limited options for premature withdrawal to encourage long-term investing, while Tier-II allows withdrawals at any time.

You can choose from various funds (equity, corporate debt, government securities, etc.) and switch funds or pension fund managers. Recent rules allow you to select up to three pension fund managers.

Liquidity

For a Tier-I account, you can withdraw a portion of your contributions after three years for specific reasons, up to 25per cent of your total contributions. You can make up to three withdrawals during the account’s lifetime. Tier-II accounts have no lock-in period.

Returns

NPS returns depend on market performance and are not guaranteed. For instance, a Tier-I account with LIC Pension Fund Ltd. had returns of 14.61 per cent over seven years for Scheme E and 7.32 per cent for Scheme C (as of July 22, 2024).

Tax Benefits

Tier-I contributions qualify for tax benefits up to Rs 1.5 lakh under Section 80C. For Tier-II accounts, only government employees get tax benefits. You can also get an additional tax deduction of up to Rs 50,000 in Tier-I accounts under Section 80CCD (1B) (old tax regime). Employer contributions up to 10 per cent of your salary qualify for tax benefits under Section 80CCD (2) (old tax regime). Under the new tax regime, the cap is now 14 per cent of your salary, as proposed in Budget 2024. For government employees, the cap remains 14 per cent.

Taxability

If employer contributions exceed Rs 7.5 lakh in a year, the excess and its income are taxable. Up to 60per cent of the amount on superannuation (either lump-sum or systematic withdrawal) is tax-free. Monthly annuity payments are taxable.

PUBLIC PROVIDENT FUND (PPF)

PPF is a voluntary tax-saving scheme for both salaried and non-salaried individuals. You can make lump-sum withdrawals after the lock-in period ends.

Investment

You can invest between Rs 500 and Rs 1.5 lakh annually, either as a lump sum or in instalments.

Liquidity

You can make one withdrawal per financial year. Partial withdrawals are allowed after six years based on a prescribed formula. After 15 years, when the PPF account matures, you can withdraw the full balance.

Returns

PPF offers risk-free returns with interest rates announced quarterly. For April to June 2024, the rate is 7.1per cent.

Tax Benefits

Contributions qualify for tax deductions up to Rs 1.5 lakh under Section 80C. All withdrawals are tax-exempt.

 EPF vs PPF vs NPS: EPF is mandatory for individuals with a monthly salary of up to ₹15,000. If you earn more than this, contributing to EPF is optional and depends on your employment contract.  Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today