Choosing one investment tool for such an important part of life can be confusing. Not investing in the right instrument could mean you are losing out on the potential returns of your investment. Hence, it's better to understand these investment instruments properly to make an informed decision.
To have a smooth and financially safe retirement, people invest in various instruments such as mutual funds, stocks, real estate along with EPF and NPS, the most common retirement instruments.
Both EPF and NPS have their own merits and demerits. For instance, in case of the Employees’ Provident Fund (EPF) the investments go predominantly in debt instruments, while the National Pension System (NPS) offers its investors 3 options of investment – equity, corporate debt, and government bonds. Hence, experts say as NPS allows its investors to have a higher exposure to equities, investing in it can fetch higher returns.
Here is what EPF and NPS offer and how they differ from one another:
In case of EPF, an employee has to make a minimum contribution of 12 per cent of their salary per month. Along with the employee, the employer also matches the contribution and contributes up to 12 per cent of the employee’s basic wages towards EPS. These contributions go towards the retirement fund of the employee. Additionally, the employee can voluntarily increase his/her share of the EPF contribution.
For employees earning more than Rs 15,000 per month, investing in EPF is not mandatory, however, for those earning below Rs 15,000 have to mandatorily contribute towards it. If an EPF investor wants to withdraw from his corpus, he/she can withdraw the full corpus only when they reach 58 years of age. However, partial withdrawals can be made under certain circumstances such as house construction, education, medical issues, etc. but only up to a particular limit. Also, EPF falls under the EEE (Exempt Exempt Exempt) category, because of which it is tax-free not only from the accrued interest but also from the accumulation on withdrawal for investments made up to Rs 1.50 lakh under Section 80C.
Unlike EPF, NPS is totally a voluntary contribution scheme. An investor has to open an NPS account on their own. The minimum contribution for NPS is set at Rs 500 in Tier I and Rs 1000 in Tier-II accounts. There is no maximum investment limit set for NPS accounts.
In case of NPS, after a subscriber reaches the age of 60, he/she can withdraw a lump sum of up to 60 per cent from their corpus. However, one of the biggest drawbacks of NPS is that after withdrawal it is compulsory for the rest of the 40 per cent balance to invest in an annuity plan. Partial withdrawals can be made up to 25 per cent of the subscriber’s NPS savings, but only after the 10th year of subscription.
With NPS subscribers enjoy full tax-exemption up to the limit of Rs 1.5 lakh under section 80C. Additionally, subscribers get tax-exemption of up to Rs 50,000 under Sec 80CCD (1B). On the employer’s contribution made towards employees’ the NPS account, employees can also claim deduction under section 80CCD (2), of up to 10 per cent of the basic salary plus dearness allowances.
Choosing one investment tool for such an important part of life can be confusing. Not investing in the right instrument could mean you are losing out on the potential returns of your investment. Hence, it’s better to understand these investment instruments properly to make an informed decision.
NPS and EPF both come with their own merits and demerits. Hence, experts suggest investors planning for retirement should opt for a combination of both the schemes to take advantage of not only the returns from NPS over EPF but also the zero risk of EPF and taxation benefits of Rs 2 lakh, together.