A debate ensued one fine day when one of my colleagues argued in favour of PPF over EPF while another one sided with NPS. They all posed this question to me?
So, whom do you think out of these 3 contenders is a better retirement tool? So, I thought about sharing my experience in the form of a conversational dialogue to let you decide for yourself. All characters appearing in this article are fictitious. Any resemblance to real persons, living or dead, is purely coincidental”?
Characters:
Ravi – A young professional in his early 30s, curious about retirement planning.
Meera – Ravi’s friend, who’s well-versed in personal finance.
Scene: A cozy coffee shop, where Ravi and Meera are catching up over coffee.
Ravi: (sipping his coffee) Meera, I’ve been thinking a lot about retirement lately. I’ve been contributing to my PPF and EPF, but I’m not sure if that’s enough. What do you think?
Meera: (smiling) It’s great that you’re thinking about retirement early on, Ravi. PPF and EPF are solid choices, but have you heard about the National Pension Scheme or NPS?
Ravi: NPS? I think I’ve come across it, but I don’t know much about it. What makes it different from PPF and EPF?
Meera: (leaning in) Well, let me tell you a little story. Imagine, a few years ago, in the world of retirement planning, there were these two giants—PPF and EPF. They were the go-to options for everyone, offering reliable returns and a sense of security. But then, in 2009, a new contender entered the scene—NPS. It was like a breath of fresh air.
Ravi: (interested) A new contender, huh? What made it stand out?
Meera: (nodding) Unlike the established giants, NPS came with a few unique features. For starters, it offered an additional ₹50,000 tax deduction under Section 80CCD(1B). That’s over and above the ₹1.5 lakh you already get with PPF and EPF.
Ravi: (surprised) That’s pretty cool! But is that all?
Meera: (smiling) Not at all. The real game-changer with NPS is its equity component. Unlike PPF and EPF, which are primarily debt-based, NPS allows you to invest a portion of your retirement savings in equity. You can choose to allocate 25%, 50%, or even 75% of your investments in equities. This equity exposure can significantly boost your retirement corpus over the long term.
Ravi: (thinking) Hmm, equity sounds riskier than debt. Isn’t that a bit risky for retirement planning?
Meera: (explaining) It might seem that way, but here’s the thing—over the long run, the risk associated with equity diminishes. That’s why NPS is so powerful. It turbocharges your retirement savings, making it a great option for those who understand the benefits of including equity in their portfolios. In fact, over the past 15 years, even the most conservative NPS funds have outperformed PPF and EPF by a significant margin.
Ravi: (impressed) Wow, I had no idea! But what about rebalancing? Don’t I have to keep adjusting my portfolio?
Meera: (smiling) That’s another great feature of NPS. It offers automatic portfolio rebalancing on your birthdays, which keeps your asset allocation within predefined limits. And the best part? It’s tax-free, unlike the taxes you’d pay on buying and selling equity and debt investments independently.
Ravi: (nodding) This sounds too good to be true. Are there any downsides?
Meera: (pausing) Well, NPS does have a strict withdrawal policy. When you retire, 40% of your corpus has to be used to purchase an annuity plan for regular income. The remaining 60% can be withdrawn as a lump sum or in phases. Some people might find this restrictive, but I see it as a blessing in disguise.
Ravi: (curious) Why’s that?
Meera: (explaining) It’s a safeguard, Ravi. It ensures that you don’t spend all your retirement savings too quickly. For those who might be tempted to splurge or lack financial discipline, this policy helps them secure a steady income stream during their retirement years.
Ravi: (smiling) You’ve convinced me, Meera. NPS sounds like a great option to add to my retirement plan. Thanks for explaining it so clearly!
Meera: (grinning) Anytime, Ravi. Just remember, it’s all about securing your future, and NPS is a solid step in that direction.
Ravi: (raising his coffee cup) To a secure retirement!
Meera: (raising her cup) Cheers to that!
Simplified Money Talks 