NPS Vs PPF Vs EPF – Which is better for retirement?

NPS Vs PPF Vs EPF – Which is better for retirement? Whether comparing the NPS Vs PPF Vs EPF is the right comparison? Why must we not compare NPS, PPF, and EPF?

Many of us try to compare the NPS Vs PPF Vs EPF and do the FUTILE exercise of judging which is best for our retirement. However, before blind comparison of these products, we must understand the underlying assets, features, and the place of these products in our retirement portfolio.

NPS Vs PPF Vs EPF – Which is better for retirement?

As I mentioned above, the comparison of NPS Vs PPF and EPF is the worst comparison one can make. Such comparisons are usually shared on social media platforms by few experts. They just concentrate on the returns part and never understand the concept of asset classes to which these products belong. Hence, understand these product features at first before a blind comparison based on RETURNS.

# Asset Class

NPS is a combination of equity and debt (it may be an alternative investment also if you have opted). It is not a pure debt product (unless you actively opted out of equity).

However, in the case of PPF and EPF, they are pure debt products. Hence, comparing NPS which is a mix of equity and debt with pure debt products like PPF or EPF is the WORST comparison one can do.

Each asset class has its own place when you construct your portfolio. One must not judge the product based on returns rather than have to consider in which asset class they fall into and then can take a call.

# Risk

In the case of NPS, as it is a pure market-linked product, the risk is higher than EPF or PPF. Many believe that risk is only applicable to the equity part. But the sad truth is debt class of NPS is also risky but the color of risk is different than equity.

However, in the case of PPF, as you may be aware the interest rate is fixed on a quarterly basis, which poses a different type of risk than NPS. Same way for EPF, as the government declares the interest rate on a yearly basis. Even though the interest rate declaration again depends on inflation and economic situation, it may not pose such a huge risk as what the debt part of NPS will pose.

In the case of NPS, as the portfolio is holding the bonds (corporate or government), they are prone to the bond market risk. However, in the case of EPF and PPF even though such risk is not there. The impact of bond market risk is much much less than the NPS.

# Taxation

As you may be aware in NPS, 60% is allowed to withdraw at the time of retirement, the remaining 40% will be converted into an annuity and such annuity income is taxable.

However, in the case of PPF, the full maturity is tax-free, and in the case of EPF its also tax-free (if someone completed more than 5 years of service and also the employee’s own contribution per year is within Rs.2,50,000). Interest earned during the tenure of interest is also tax-free in both products.

# Features

NPS and EPF are meant for retirement. However, they both come with different features. PPF can be linked to retirement or for any goal which is more than 15 years or so. In terms of liquidity, they offer different rules and one can’t compare them and judge which is best. (Refer to our all earlier articles on EPF and PPF at “EPF and PPF“

Conclusion – After analyzing these above-mentioned pointers, you noticed that comparing NPS Vs PPF Vs EPF is one of the worst financial mistakes you can make. Each of these products comes with different features, asset classes, risks, taxation, and purpose. Judging products based on returns or taxation is the worst comparison one can make. Hence, stay away from such comparisons. Instead, analyze the risk involved in such products and consider EPF and PPF as pure debt products of your retirement portfolio. However, in the case of NPS, you have to consider the equity part of it as the equity part of retirement and debt as the debt part of a retirement portfolio.