Retirement planning in India is frequently based on three major government-backed schemes: NPS vs PPF vs EPF – Which Is Best for Retirement?. Each serves a specific goal, such as safety, tax breaks, or market-linked growth. However, depending only on these may leave you underprepared for retirement. Mutual funds must be included in a more holistic portfolio to enable wealth building, diversity, and flexibility that traditional methods cannot provide.
In this article, we will look at each of these instruments in depth, compare their benefits and drawbacks, and explain why mutual funds are important for achieving financial independence after retirement.
Understanding the Basics: NPS, PPF, and EPF
- National Pension System (NPS)
The National Pension System (NPS) is a government-regulated, market-linked retirement plan. Its goal is to help people save for retirement over time.
Key Features:
Eligibility: Anyone who is an Indian citizen (including NRIs and OCIs) who is between the age group of 18 and 70 can apply.
Investment Flexibility: Investors can allocate their funds across equity, corporate bonds, and government securities, choosing between Active Choice or Auto Choice for asset allocation.
Returns are market-linked and fluctuate according to asset allocation. Historically, ranging from 8 to 12% per year, depending on equity ownership.
Tax Benefits:
- You can deduct up to ₹1.5 lakh under Section 80C (part of 80CCD(1)).
- Section 80CCD(1B) gives you an extra ₹50,000 off.
- Section 80CCD(2) also allows tax breaks for employer contributions.
Withdrawal Rules:
- Partial withdrawals are allowed after 3 years for specific reasons like higher education, illness, or home purchase.
- On retirement (typically at age 60), 60% of the corpus is tax-free, while 40% must be used to buy an annuity, which will provide a monthly pension (taxable as per income tax slabs).
- Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a government-backed long-term savings system with guaranteed returns and tax advantages.
Key Features:
Eligibility: All Indian residents, including minors (via guardianship), can apply.
Lock-in Period: 15 years, however, you can also extend it in blocks of 5 years.
Interest Rate: 7.1% per year (as of the April–June 2025 quarter), reviewed by the Ministry of Finance every three months.
Tax Benefits:
- Contributions (up to ₹1.5 lakh per financial year) can be deducted under Section 80C.
- Interest earned and maturity proceeds are fully tax-exempt, following the EEE (Exempt-Exempt-Exempt) tax status.
Liquidity:
- Partial withdrawals are allowed after the completion of 5 years.
- A loan facility is available between the 3rd and 6th year of account tenure.
- Employees’ Provident Fund (EPF)
The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme for salaried employees working in EPFO-registered establishments.
Key Features:
Eligibility: This applies to employees of companies that have 20 or more workers registered with the EPFO.
Contribution Structure: The employee and employer each put in 12% of the employee’s base wage plus the dearness allowance (DA).
Interest Rate: The government has set the EPF interest rate for FY 2024–25 at 8.25% per year.
Tax Benefits:
- Section 80C lets you deduct employee contributions from your taxes.
- As long as the employee has been working for the company for at least five years, the maturity amount, including interest, is tax-free.
Rules for Withdrawals:
- You can make partial withdrawals for certain reasons, such as housing, higher education, marriage, or medical situations.
- You can usually take out all of your money when you retire (at age 58) or when you are unemployed for more than two months.
Comparing NPS, PPF, and EPF
| Scheme | Eligibility | Returns | Lock-in | Tax Status | Liquidity |
| NPS | Any Indian citizen (18–70 years) | Market-linked (8–12% historical) | Locked till retirement (with partial exit option) | Contributions and 60% corpus tax-exempt; annuity taxable | Partial withdrawals for specific reasons |
| PPF | Any Indian resident | Fixed (7.1% p.a., reviewed quarterly) | 15 years (extendable) | EEE (fully tax-free) | Partial withdrawals after 5 years; loan available |
| EPF | Salaried employees in EPFO organisations | Fixed (8.25% for FY 2024–25) | Till retirement (with some early withdrawal | EEE (tax-free after 5 years of service) | Partial withdrawals for housing, education, medical, etc. |
Why Mutual Funds Are Essential for Retirement Planning
While programs like as EPF, PPF, and NPS provide security and discipline, they may not create enough growth to build a truly comfortable retirement fund. Mutual funds, particularly equities mutual funds, play an important role here.
Here’s why mutual funds should play a key role in your retirement portfolio:
Higher Long-Term Growth Potential
Historically, diversified equities mutual funds have delivered annualised returns of 12-15% over time, well above the conservative returns provided by EPF, PPF, and even NPS. This development potential can greatly increase your retirement funds over the next 15-20 years.
Effective Inflation Hedge
Relying primarily on fixed-income products such as EPF or PPF may expose your savings to inflation. Equity-oriented mutual funds contribute to market growth, allowing your investments to grow in real terms and protecting your purchasing power in retirement.
Greater Flexibility and Liquidity
Most mutual funds don’t have lock-in periods, but ELSS funds do, and they last for three years. You can take money out or change your investments whenever your financial condition or retirement aspirations change.
Diversification Across Assets and Sectors
Mutual funds invest in many different sectors, industries, and asset classes, which lowers your risk and makes you less reliant on any one market segment. This kind of diversification is important for keeping and growing your wealth over time.
Customizable Investment Strategies
Whether you’re a conservative, moderate, or aggressive investor, mutual funds offer products that match your risk appetite and retirement timeline. You can start with equity funds in your early working years and gradually shift towards hybrid or debt funds as retirement approaches.
How Much Should You Allocate to Mutual Funds?
If you’re currently relying primarily on EPF/PPF/NPS, consider this balanced asset allocation model:
- Core Corpus via Equity Mutual Funds – 50-60%
Long-term wealth creation and inflation beating.
Consider a mix: large-cap, mid-cap, thematic or international equity.
- NPS – 20-30%
Professional management plus annuity discipline; auto-rebalancing.
Equity allocation builds the backbone of long-term growth.
- EPF & PPF- 10-20%
Safe, guaranteed returns cushion the portfolio.
Tax benefits and debt exposure stabilize against volatility.
- Additional Debt/Hyrbrid Funds- (5-10%)
Liquid or short-term funds for emergencies.
Hybrid funds blend equity upside with debt stability.
Real Life Example-
For instance, if you have a target corpus of ₹5 crore at retirement:
Mutual Funds: ₹2.5- 3 crore
NPS: ₹1- 1.5 crore
EPF/PPF: ₹0.5- 1 crore
Over time, this blend adjusts the risk-return balance as you age.
Building Your Retirement Plan: Key Action Steps for a Secure Future
1. Assess Your Retirement Needs
The first step in retirement planning is to determine how much money you’ll need. Begin by calculating your future expenses, which include daily living expenses, medical bills, lifestyle choices, and inflation. Remember that what appears to be a vast corpus now may not be sufficient 20 or 30 years later. Determine your target amount using a retirement corpus calculator or by consulting with a financial counsellor. Accounting for inflation at an average rate of 6-7% each year is critical to prevent underestimating your demands.
2. Maximize Employer-Sponsored Benefits (EPF and NPS)
As a salaried employee, take full benefit of employer-linked retirement programs like EPF and NPS. EPF contributions are automatic, but you should check to see if your employer offers to co-contribute to NPS. Participating in the NPS provides you with not just increased tax benefits, but also access to market-linked growth prospects via equity exposure. These employer-sponsored plans provide a foundation layer of financial security for your post-retirement years.
3. Open a PPF Account (But Don’t Over-Allocate)
Opening a Public Provident Fund (PPF) account is a smart way to build a low-risk, tax-free debt component within your retirement portfolio. PPF offers guaranteed returns and tax-free maturity benefits, making it attractive for conservative investors. However, avoid putting a large portion of your retirement savings into PPF. Its 15-year lock-in period and relatively modest returns (currently 7.1% p.a.) mean it works best as a supporting tool rather than the main growth engine for your retirement corpus.
4. Set up SIPs in diversified mutual funds
To really build your retirement savings, start investing in mutual funds through Systematic Investment Plans. Begin early in your career, even with little monthly payments, and gradually increase your SIPs as your income grows. Equity mutual funds, notably index funds, flexi-cap funds, and large-cap funds, have historically provided 12- 15% annualised returns in the long run. This expanding potential allows your retirement savings to exceed inflation. As you approach retirement, consider gradually transitioning to hybrid or debt mutual funds to reduce risk and preserve capital.
5. Assess and Rebalance Annually
Retirement planning isn’t a one-time activity. Make it a practice to evaluate your financial portfolio at least once a year. Examine whether your existing asset allocation corresponds to your changing risk profile and retirement date. As you near retirement, minimise your equity exposure and invest more in safer debt securities. Rebalancing protects your capital while assuring consistent growth, keeping your retirement plans on pace.
Conclusion
While EPF, PPF, and NPS are valuable retirement savings tools, they are insufficient to satisfy your long-term financial objectives. To overcome inflation and build a large corpus, you must actively invest in equities mutual funds. A well-balanced blend of safety (EPF, PPF, and NPS) and growth (mutual funds) is essential for a financially secure retirement.
Frequently Asked Questions (FAQs)
1. Which is better for retirement planning: NPS or PPF?
NPS and PPF perform different functions. NPS is a market-linked, retirement-specific investment that has the potential for better returns but requires annuity purchases at maturity. PPF, on the other hand, provides assured, tax-free returns but with limited growth potential. If your goal is long-term growth and retirement income, NPS often provides a higher return potential, but combining the two can provide diversification.
2. What retirement savings strategy provides the best returns?
Because of its equity exposure, NPS has historically provided the best return potential, with returns ranging from 8% to 10% or higher. It does, however, carry some market risk. EPF provides consistent and guaranteed returns, often ranging from 8% to 8.5% each year. PPF offers government-mandated fixed rates ranging from 7% to 7.5%, making it a safer but lower-yielding option. Your choice should be determined by your risk tolerance and long-term financial objectives.
3. Is it possible to have both NPS and EPF?
Yes, certainly. You can invest in both NPS and EPF at once. In fact, many salaried workers do this to maximise their retirement savings and tax breaks. Salaried employees are normally required to contribute to EPF, but NPS is voluntary and highly encouraged for further corpus building and tax benefits under Section 80CCD(1B).
4. Should I invest in mutual funds if I have EPF and PPF?
Yes. EPF and PPF alone may not be sufficient to fully support your retirement, especially given inflation and escalating medical costs. Mutual funds, particularly equity mutual funds, have a higher growth potential, making them vital for developing a larger portfolio over time.
5. What percentage of my retirement money should go into mutual funds?
How much of your retirement savings you should invest in mutual funds is determined by your age, risk tolerance, and long-term goals. If you are younger, you may afford to take more risks and devote a higher portion of your portfolio to equity mutual funds for growth. To protect your cash as you approach retirement, it is safer to invest in debt or balanced funds. As you get older, one common technique is to gradually transition from high-risk to low-risk investments. Diversifying and analysing your portfolio on a regular basis is essential. If you are unsure, it is always a good idea to contact with a financial counsellor to create a strategy that is tailored to your specific circumstances.