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Which is better : FD, PPF, NPS, EPF?

Returns, lock-in and tax benefits are some of the angles where these investment options vary.

There are different types of investment options that can help us fulfil various financial goals and save tax as well. Fixed deposits, public provident fund, national pension system and employee provident fund are some of the popular investment options. But how will you pick the best? It depends on ability to take risks and the individual’s behaviour.

Let us understand these investment avenues and compare it on few of its parameters.

Investment options

Fixed deposits

Indians love fixed deposits. Fixed deposit is a risk free investment option that gives a fixed rate of return per annum. Unlike other investment options where returns depend on the market, it is not so in case of fixed deposits. Whether the market is in a slump or riding on euphoria, you will still get the interest rate that you have been promised.  If you want to park some lumpsum amount, then fixed deposits will be the easiest way to invest. Moreover, an amount of Rs. 1 lakh is safeguarded by the Reserve Bank of India if the bank fails to pay out due to any reason. However, it is highly unlikely that banks will default on fixed deposits.

One can start a fixed deposit with Rs.1,000 as well for a minimum of seven days to 10 years. Once the amount matures, you can reinvest it or withdraw the corpus. However, you can’t withdraw money before the lock-in period. However, in case of an emergency, you can withdraw money from FD by paying penalty.

However, there are also limitations of fixed deposits. The interest rate offered does not take into account the prevailing or expected inflation rate. Hence, in many cases, the interest rate of fixed deposits may not be inflation beating or give any real returns. Real return is the rate offered by an investment avenue minus the rate of inflation.  Another drawback of fixed deposits is that it is not tax efficient. The interest received is taxed based on the income slab of the depositor. Moreover, TDS of 10% is also applicable if the interest income in a financial year is more than Rs.10,000.

If you are okay with the taxation rather than losing your mind over the market returns, fixed deposits can be an ideal investment option for you.

Public Provident Fund (PPF)

Public Provident Fund (PPF) is a voluntary retirement investment avenue that is available for anyone be it a student, self employed or employee or a retired person. Just like fixed deposits, PPF also gives a fixed rate of return. However, the rate of interest is revised on a quarterly basis. Currently, the interest rate is at 8% (April-June 2019). Typically, the rate of return of PPF is higher than fixed deposits. Hence, it can help investors to generate more wealth.

Provident fund is extremely easy on the pocket as subscribers can invest a minimum of Rs. 500.  Contribution to PPF is also tax efficient. Contribution to PPF can be used for tax deduction under Sec 80C of the Indian Income Tax. The maturity amount is also tax free on the hands of the subscriber.

One of the disadvantages of PPF is the limited flexibility. PPF comes with a lock-in period of 15 years. Hence, one can’t withdraw the money before the lock-in period. Moreover, it can be extended in blocks of five years only. The maximum amount one can invest in PPF in one financial year is Rs.1.5 lakh. One can invest more than Rs.1.5 lakh in a financial year but it won’t attract any interest. 

National Pension System(NPS):

NPS was introduced by the government of India and is managed by the Pension and Regulatory Fund of India(PFRDA). It is a voluntary retirement savings avenue available for individuals above 18 years of age. Subscribers can invest in four asset classes viz. equity, corporate bonds, government bonds and alternative investment funds through NPS. There are two broad options to invest in NPS: Active and Auto option. In an active option, the subscriber can invest in different asset in a proportion of their choice. However, the age of the subscriber is also an important deciding factor in NPS. Investors below the age of 35 can invest a maximum of 75% in equities. The equity portion will gradually decrease with time. In the active option, the total proportion to the various asset classes should add up to 100%. In the auto option, there are three investment options based on the risk appetite of the person. These are aggressive life cycle fund, moderate life cycle fund and conservative life cycle funds for aggressive, moderate and conservative investors respectively.

After maturity at 60, the subscriber has to use 40% of the corpus to buy annuity plans which will help them to provide for a regular source of income. The rest 60% can be withdrawn lumpsum or as and when required. In terms of taxation, the annuities are taxed according to the tax slab of the subscriber while the remaining 60% is tax exempt. In NPS, the returns are not fixed and are based on the market. 

Employee provident fund:

Employee Provident Fund is a retirement option that is available only for the salaried employee with companies registered under the EPF Act. EPF also gives a fixed rate of return which is fixed by the finance ministry. The EPF interest rate for FY 19 is 8.65% per annum. Unlike the other retirement option, it is compulsory for all the employees of that organisation. EPFO can invest a maximum of 15% in equities and the rest in government bonds. This is the reason why EPF give higher interest than PPF.  However, with a higher equity exposure comes with higher risk. EPF is liquid than PPF as one can withdraw 75% of your EPF corpus if you are unemployed for a period of one month. You can withdraw the entire EPF corpus if you are out of work for more than two months. However withdrawals will be taxed if you withdraw your EPF corpus within 5 years of account opening.

To summarise, each investment option has both positive and negative angles. The key here is to understand the objective behind the investment which can be wealth generation or saving for retirement. Choose your pick wisely.

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