NPS Vs EPF: Which one should you go for your retirement?

By: |
Published: November 29, 2019 4:06:28 PM

Not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

PF, Provident Fund, EPF, Employees' Provident Fund, NPS, national pension system, PFRDA, FD, PPF, Employees' Provident Fund Organisation, EPFO, PF transfer, PF withdrawal, UAN, Universal Account Number, PAN, Aadhaar, income tax benefit, section 80C, equity, mutual funds, Section 80C, nps benefits, nps premature exit rules, nps early retirement, The choice between NPS and EPF depends on the aspirations and risk-taking abilities of an individual.

The Employee Provident Fund (EPF) is a retirement-oriented investment with tax-saving benefits. The Employees Provident Fund Organisation (EPFO) is currently offering an interest rate of 8.65 per cent for the financial year 2018-2019 on EPF.

The National Pension System (NPS) is also considered as one of the best investment tools for retirement. NPS offers three options of investment to its investors: equity, corporate debt, and government bonds. Comparatively, investing in NPS can fetch higher returns as it allows its investors to have higher exposure to equities.

However, choosing one investment tool can be confusing. Not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

Find out how do they differ from one another:

  1. Investing in EPF is not mandatory for employees earning more than Rs 15,000 per month, while those earning below Rs 15,000 have to mandatorily contribute towards it. In the case of NPS, investing in it is totally voluntary.
  2. In the case of EPF, an employee has to make a minimum contribution of 12 per cent of his/her salary per month, which can be increased voluntarily. The minimum contribution for NPS is Rs 500 in Tier I and Rs 1000 in Tier II account, and there is no maximum limit set.
  3. Employees along with the employers both contribute 12 per cent of the employee’s basic wages towards EPS.
    NPS, on the other hand, is a voluntary contribution scheme, and investors can open an NPS account on their own.
  4. In the case of EPF, the full corpus can be withdrawn once the investor reaches 58 years of age.In the case of NPS, once the subscribers reach the age of 60, he/she can withdraw a lump sum of up to 60 per cent of their corpus. However, it is compulsory to invest the rest of the 40 per cent balance, in an annuity plan. This is one of the biggest drawbacks of NPS.
  5. Partial withdrawals under EPF are allowed under certain circumstances like education, house construction, medical issues, etc. up to a particular limit.
    In the case of NPS, partial withdrawals can be made up to 25 per cent of the subscriber’s savings, but only after the 10th year of subscription.
  6. EPF falls under the EEE category. Hence, it is tax-free from the accrued interest and the accumulation on withdrawal for investments made up to Rs 1.50 lakh under Section 80C. Investments in NPS enjoy full tax-exemption up to the limit of Rs 1.5 lakh under section 80C and an additional Rs 50,000 under Sec 80CCD (1B). Further, employees can claim deduction under section 80CCD (2), up to 10 per cent of the basic salary plus dearness allowances, on the employer’s contribution made towards employees’ NPS account.

What should you do?
The choice between NPS and EPF depends on the aspirations and risk-taking abilities of an individual. Rachit Chawla, Founder, and CEO, Finway, says, “Between NPS and EPF, the latter is considered quite safe as pension in EPF is independent of market conditions and the investor can easily forecast about his future returns. Of course, the long-term returns of NPS are mostly higher due to more exposure to equities, but the 40 per cent of the accumulation that needs to be invested in annuity or pension product after maturity of the investment is a major drawback.”

For instance, an investor of 28 years, currently earning Rs 75,000 and spending Rs 35,000 per month, aims for Rs 50,000 per month as pension post-retirement. If chooses NPS, his monthly contribution towards his goal will be comparatively less, but tax benefits will be more. On the other hand, EPF comes with almost zero risk involvement, primarily as a debt instrument, with an upper capping of 15 per cent on equity allocation. Experts suggest a combination of both would be the ideal option.

Chawla of Finway says, “If there is EPF policy in an investor’s company where he has to contribute 12 per cent of his salary as a part of EPF, he can invest some part of his salary in NPS as per his choice. EPF and NPS both serve as complimentary and two varying modes of investment returns and the best course is to opt for both.”

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Embedded value: Can an insurance company go bankrupt?
2Buying a car vs hiring a cab – which is more profitable?
3Government Employees’ Pay Scale can be reconsidered by State if anomalies appear: SC