Deductions under 80C: PPF vs EPF vs NPS

We have seen a few tax savings investments in the previous articles. In this article, let us compare three tax savings schemes under 80C that are pretty long term – PPF vs EPF vs NPS

Before we look at the different schemes, lets understand the different events that can be taxed or exempted.

Exempt, Exempt, Exempt – also called EEE. The first E indicates that the original investment enjoys tax exemption. The second E is for the interest earned is tax exempt and the third E denotes that the total income earned on maturity is also tax exempted.
Right now only PPF and EPF enjoys EEE taxation.

The other possibilities are ETE and EET.
ETE means the interest you earn is taxable. Example: tax saving fixed deposits and NSC.
EET means the maturity amount or withdrawals are taxed. Example: Pension plans, and National Pension Schemes.

Public Provident Fund

PPF is a tax free savings scheme provided by the government. They have a minimum maturity of 15 years. PPF belong to the special type of investment which enjoys EEE taxation. Any money that you invest (upto 1.5lakhs per year) enjoys tax deductions, any interest you earn is also tax exempted and on maturity how much ever you get back is also tax exempted.
In the rare event of a person declares bankrupty, the debtors can never touch your money in PPF. So the government protects the people of their life savings.

The thing that I don’t like about PPF is that the interest rate is calculated on an annual basis and the interest rate also keeps changing.

But this is a good investment/savings option for people who don’t have Employees’ Provident Fund.

Employees’ Provident Fund

EPF is similar to PPF, but is managed by the EPFO (Employees’ Provident Fund Organisation). It is a way to make sure that employees of private organisations are saving some money from their income. If you have an EPF account and work for a company which falls under the EPF rules, a small portion of your salary goes to your EPF account.
12% of your basic salary is deducted by your employer and deposited in your EPF account. The employer also makes an equal contribution.
EPFs also follows the EEE tax exemption rules and has similar interest rates as PPF, in fact usually higher rates too.

If you are an employee, check with your payroll department or HR to find out how much money is being deposited in your EPF account every month and that will help you in planning your 80C better.

National Pension Scheme

NPS is a pension scheme that has been started by the Indian Government to allow people working in unorganised sector and other working professionals to have a pension after retirement. This also falls under 80C and you can invest upto Rs.1.5 lakhs. But there is also an additional section 80CCD(1B) which allows an extra Rs.50,000 to be invested.

NPS has different schemes and tiers depending upon the risk profile of the subscriber. The money you save under NPS is managed by a fund manager and the fund management charges are the lowest ever compared to any other mutual fund. But the exposure in equity is capped to 50% only.

The best parts of NPS are the very low fund management charges and the extra Rs.50,000 on top of the Rs.1.5 lakh deduction.

But the bad part of it is it belongs to the EET type of investment. That means the money on maturity is taxable. And you also don’t get to withdraw all your money on maturity. Only a partial withdrawal is allowed, and you can get regular monthly pensions.

Which to choose?

It depends.
If you are not employed, EPFs are not an option.
If you want that extra Rs.50,000 savings, but don’t mind the really long lock in and monthly pensions, NPS is a good option.
If you want a plain simple tax savings then PPF is good enough.

Personally, I have an PPF account that I keep putting a small amount in every year. And put the remaining money in a ELSS fund.

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