Part 5: Retirement Planning – EPF vs PPF vs NPS vs MFs

Whether we talk about Retirement Planning, Early Retirement, Financial Freedom or Financial Independence, it requires disciplined investing for the long term to achieve these financial goals.

In this article, we will talk about different government schemes and investment options for retirement. We will discuss risks, returns, maturity and withdrawal rules about these investment options.

Topics covered:

• Employees’ Provident Fund (EPF)
• Public Provident Fund (PPF)
• National Pension System (NPS)
• Solution Oriented Funds & Pension Plans
• Helpful Tips 

Employees’ Provident Fund (EPF):

EPF is Retirement benefits scheme under the supervision of the Government of India that salaried employees can avail from their employer. The employer deducts 12% of the employee’s salary (basic + dearness allowance) to the EPF. Similarly, employees also contribute 12% to the EPF.

It allows deduction up to Rs 1.5 lakh under Section 80C and the maturity amount of EPF is completely tax-free.

• Risk: Low
• Return: Moderate (8-9% appx)
• Liquidity: Low (Maturity on Retirement)

EPF – Withdrawal Rules:

• Complete EPF Withdrawal:
  • Upon retirement (58 years age) or 
  • If unemployed for two months of time
  • Death of the scheme subscriber
• Partial EPF Withdrawal:
  • Medical treatments for certain diseases for self or of immediate family members
  • For the marriage of self, son, daughter, brother, and sister
  • For self education or child’s education
  • Purchase of land or property or construction of a house
  • Home loan repayment & Renovation

EPF – Returns:

Return: EPF interest rate is 8.15% for the financial year 2022-2023.

EPF returns are generally slightly higher than inflation rate. Here are historical EPF returns for last few years.

Public Provident Fund (PPF):

The Public Provident Fund (PPF) is a long term investment scheme provided by the government with stable returns.

It allows deduction up to Rs 1.5 lakh under Section 80C and the maturity amount of PPF is completely tax-free.

• Risk: Low
• Return: Moderate (7-8% appx)
• Liquidity: Low (15 Year lock-in)

PPF – Important Rules:

• Open a PPF Account online, at a bank or the post office
• For each financial year:
  • Minimum deposit of Rs 500 required to keep account active
  • Maximum deposit up-to Rs 1.5 lakh 
  • No restriction on the number of installments
• Interest rate is calculated on the minimum balance between the fifth day of the month and the last day of the month

Tip: Deposit in PPF by 5th of every month to get maximum gains

PPF – Withdrawal Rules:

• Complete PPF Withdrawal:
  • After maturity (15 years)
  • Premature Closure for certain medical treatments or higher education (after completion of 5 years)
  • Death of the account holder
• Partial PPF Withdrawal:
  • 50% of the balance after 6 years
• Tenure of PPF account can be extended by a block of 5 years to keep accumulating interest on corpus.

National Pension System (NPS):

National Pension System (NPS) is a government-sponsored pension scheme available for both salaried individuals and non-salaried individuals.

It is a market-linked scheme which is managed by professional fund managers. After retirement, 60% of the total corpus can be withdrawn, and remaining 40% will go into annuity plan.

• Risk: Moderate
• Return: High
• Liquidity: Very Low (at the age of 60)

NPS – Additional Tax Benefits:

• NPS allows additional exemption up to Rs 50,000 under Section 80CCD(1B)
  • So, total deduction of 80C (1.5 lakh) & 80CCD(1B) can be up-to Rs 2 lakh
• Additionally, NPS allows employer tax free contribution up-to 10% of salary (max 7.5 Lakh) under 80CCD(2)

NPS Account & Contribution:

• Open a NPS account online via eNPS portal or visit PoP-SP for offline
• Tier-I NPS Account (Pension account)
  • Minimum one contribution and minimum Rs 1000 per Financial year required to keep account active
  • Maximum deposit up-to Rs 1.5 lakh
  • No restriction on the number of installment
• Tier-II NPS Account
  • No mandatory contribution and no minimum balance required
  • Minimum amount of contribution Rs 250

NPS – Investment Options:

• NPS allows you to choose one from available Pension Fund Managers (PFMs) such as HDFC Pension Management Company Limited, LIC Pension Fund Limited
• Investment options for assets allocations:
  • Auto Choice – default options for passive investors to set automatic allocation
  • Active Choice – for subscribers who wish to manage their assets allocation

NPS  – Returns:

Returns vary as per Asset Allocations by Subscriber. For example, there are three different options available within ‘Auto Choice’ :

1. Aggressive
2. Moderate and
3. Conservative.

• Aggressive -> Up-to 75% in Equity | High Risk & High Return
• Moderate -> Up-to 50% in Equity | Moderate Risk & Moderate Return
• Conservative -> Max 25% in Equity | Low Risk & Low Return

Solution-Oriented Mutual Funds:

• Solution-oriented funds are designed to meet specific financial goals like retirement, child’s education, marriage, etc
• Retirement Funds
  • lock-in period of at least five years or until retirement age
• Children’s Funds
  • lock-in period of five years or till the child attains the age of 18 years

• Risk: Moderate (Mostly invests in stocks and debts)
• Return: Moderate to High (8-12% appx)
• Liquidity: Moderate (5 Year lock-in)

Return: These type of Funds invest in Equity and Debt. In last few years, mostly historic returns has been between 8-12% in the long term (5 Yr CAGR) but they can vary. For reference, you can visit Trendlyne, Groww or other websites to compare them based on latest returns and other factors.

Retirement Plans & Pension Plans:

• Plan Types
  • Market Linked Plan
  • 100% Guaranteed Return Plan
  • Annuity Plan
• Compare funds/plans/schemes online such as on www.PolicyBazaar.com
• Many plans available from different Insurers companies such as: HDFC Life Click 2 Retire, Max Life Guaranteed Lifetime Income Plan, SBI Life Saral Retirement Saver, LIC New Jeevan Shanti Plan, Tata AIA Life Insurance Guaranteed Monthly Income Plan etc

You can compare these plans with EPF, PPF, NPS, Mutual Funds as well on www.PolicyBazaar.com.

How Much Money is needed for Retirement?

“The question isn’t at what age I want to retire, it’s at what income.”

George Foreman

Sometimes, we just select a random amount such as 10 lakh, 50 lakh, 1 Cr, 10 Cr for Retirement but it is important to analyse your income and future expenses to decide a realistic amount or corpus.

Here are a few factors on which you can analyse or calculate what amount you want to accumulate for your retirement.

• Calculate Future expenses
  • Living expenses, future goals, children education & marriage etc
• Consider Inflation
  • The inflation rate (CPI) in India has been around 5 to 7% in the past few years.
• Consider Life expectancy
  • The current life expectancy for India in 2023 is appx 70 year

It is advisable to calculate how much is already getting invested in EPF (if you are salaried employee) from your salary, so that you can plan how much more you need to invest for retirement based on the above factors. Then, you can invest the required amount in different retirement options by proper diversification.

Tips for Successful Retirement Investing:

• Have a Term Insurance if you have family dependents on your income or have loan
• Have a Health Insurance to avoid any medical expenses impacting your investments
• Follow a Disciplined Investment such as SIP in Mutual Funds or opt for NPS corporate
• Follow proper Asset allocation
• Shift from Equity to Debt when goal or retirement is near so that your retirement fund is less impacted due to stock market volatility at the end.

Top reference and resources:

Checkout some of the best resources available on the same topic.

• https://www.youtube.com/watch?v=uO8EoK6wUIY&ab_channel=CARachanaPhadkeRanade
• https://www.youtube.com/playlist?list=PL9DpKzAHkdgowBI153YX8fzpJAeK-oop-
• https://www.youtube.com/watch?v=KGC5RQEvDro&ab_channel=YadnyaInvestmentAcademy
• https://www.youtube.com/watch?v=yK0iKkh_kXs&ab_channel=AssetYogi

Disclaimer:
We are not Sebi Registered. Investing and trading in stock market, future and options, mutual funds, cryptocurrency, involve substantial risk of loss. Any such discussion or information provided here is for educational purposes only and before making any investment decisions, please consult with a financial advisor.