The Indian salaried class have a range of retirement savings options to choose from. Some of the popular tools include the Employees' Provident Fund Organisation's EPF, Public Provident Fund (PPF) and National Pension System Trust's NPS. Depending on salary, tax goals and retirement planning, employees can choose these instruments that come with unique features and utilities. EPF is mandatory for most salaried employees and offers stable, government-backed returns with employer contribution benefits.
PPF suits conservative investors seeking long-term tax-free savings. It comes with flexible deposits and offers guaranteed returns at 7.1% interest at present. NPS, meanwhile, combines equity and debt exposure, making it attractive for higher retirement corpus creation. It also comes with additional tax deductions under the old tax regime.
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Understanding the features of these three tools is important so that investors can choose them as per their needs:
1. PPF - PPF is a popular, government-backed long-term savings scheme that offers guaranteed, tax-free returns. It features a 15-year lock-in period and allows investments between Rs 500 and Rs 1.5 lakh per financial year. Contributions made into PPF can be used to lower tax liability and maturity and interest are tax free. The scheme can also be extended in blocks of five years.
Yearly Investment: Rs 1,50,000
Time Period (In Years): 30
Rate of Interest 7.10%
Invested Amount: Rs 45 lakh
Interest Earned: Rs 1.09 crore
Maturity Value: Rs 1.54 crore
2. EPF - The EPF is a mandatory retirement savings scheme for Indian employees. It is managed by the EPFO and involves a 12% contribution from both employee and employer, based on the employee's monthly basic pay. At present, it offers 8.25% returns and is tax free after completing certain years of service.
One of the smart features about this scheme is that it also allows employees to extend their contribution. This can be done via Voluntary Provident Fund (VPF), which is an optional savings scheme. It allows employees to contribute more than the mandatory 12% to their EPF.
Monthly basic salary - Rs 50,000
Age: 30 years
Annual salary increase - 5%
Return - 8.25%
Estimated corpus value at 60 years - Rs 2.6 crore
3. NPS is a voluntary, market-linked retirement savings scheme. This can be availed by citizens between 18 to 70 years of age. Under this, one can build their pension corpus till age 60. After this 60% can be withdrawn tax free, while the remaining amount needs to be used to purchase an annuity. This annuity serves as a monthly pension.
Monthly Investment: Rs 12,500
Expected Return on Investment: 10%
Current Age: 30 years
Retirement Age: 60 years
Percentage of Annuity Purchase: 40%
Expected Returns from the Annuity: 8%
Pension Wealth: Rs 2,84,91,567
Investment Amount: Rs 45,00,000
Lumpsum Amount Withdrawn: Rs 1,70,94,940
Annuity Value: Rs 1,13,96,627
Monthly Pension Amount: Rs 56,000
The calculation shows that investing in PPF, EPF and NPS can have varied outcomes over a long-term period. PPF, despite its lower returns, comes with a guarantee and is government-backed. EPF also behaves similarly but offers slightly higher returns, making it an ideal investment option. NPS has the potential to generate the highest corpus value as it is linked with the market, but also comes with risks.
This is why financial experts recommend picking a mix of assets to reduce volatility and focus on long-term wealth journeys instead of short term gains. For maximum optimisation of portfolio, one can consult a certified advisor and share their personal financial goals to get a tailored roadmap.
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