The key retirement savings that employees in India look at are the Employee Provident Fund and the National Pension System.
Start early, leverage on the power of compounding, is the mantra behind a robust retirement plan. The dilemma also is on balancing the cash availability for today’s spending versus saving for the rainy future day. The salaried class, therefore, prefers schemes which have tax exemptions/ deductions which would help them reduce the cash outgo on current tax payouts. Savings for retirement are, therefore, driven by tax considerations to a great extent.
The various aspects that employees consider while deciding on investments for retirement include factors such as whether these would help them build adequate corpus, whether it would provide good returns and also whether these would be tax-efficient.
The key retirement savings that employees in India look at are the Employee Provident Fund (EPF) and the National Pension System (NPS). While the PF scheme helps employees build up a corpus for the future, the NPS helps them have a corpus as well as generate an annuity income from the same. The government, with the motive of enabling the country to be a pensionable society, has also provided significant impetus to the NPS.
Currently, the lion’s share of the employee’s retirement corpus is captured by the PF scheme. There are good reasons for the same. Firstly, it is a government-backed scheme and offering attractive interest, the rates for which are declared by the Central Board of Trustees of the Employees Provident Fund Organisation. Further, the entire corpus received on retirement is tax-free provided the employee has been on continuous employment of five years at the time of withdrawal.
There are other advantages to this scheme which enable employees to withdraw funds from this corpus for specific personal reasons such as house construction, marriage etc. The employee may also withdraw the corpus in the event of unemployment for at least two months period. However, the EPF does not give an option of annuity to members. Hence, it is necessary that the tax-free corpus received on retirement is diligently invested to generate returns to maintain a reasonable standard of living during the sunset years.
Employees are looking at alternatives which would provide high returns as well as flexibility. NPS is also a good option as it is a market-linked retirement saving product. NPS gives the employees the flexibility of earning returns which over a longer period would be higher than the PF returns since the investments under the NPS scheme also include investments in stock market and debt-related investments. The scheme also provides flexibility to determine the quantum of investment in equities versus debt instruments; if the investor determines not to make a choice, a pre-determined auto allocation is made based on the age of the investor. Higher the age, higher would be the allocation to debt related investments as compared to equity.
The scheme is also attractive due to the low cost of management of funds as well as the tax benefits bestowed on the scheme. Apart from the deduction where employee contribution to NPS is part of the aggregate deduction of INR 150,000 u/s 80C, an additional deduction of INR 50,000 in respect of employee contribution to NPS is available. Employer contribution to NPS up to 10% of salary as defined is also available as a deduction. Further 60% of the NPS corpus on withdrawal at the point of retirement is tax-free. The remaining 40% has to be mandatorily invested with an annuity service provider which would generate an annuity to the investor. The scheme offers the dual benefit of tax-free lumpsum withdrawal on retirement and annuity post retirement. However, annuity is taxable in the respective years of receipt.
As seen from the above, it can be said that each product has its own benefits. Rather than preferring one over the other, an employee may opt for both. Opting for PF will enable the employee to have a reasonably good corpus readily available on retirement or in the event of a financial emergency and the corpus in NPS may still be available for future. So, opting for both will enable an individual to remain secured on both fronts. In today’s uncertain business scenario, especially due to the Covid-19 pandemic, this matters. Further, employees who have a few years of service left should continue to opt for EPF, while new joiners and young employees may choose to opt for NPS or both, to enable them to build a healthy corpus.
In light of the above discussion, it is evident that both EPS and NPS go hand in hand. Both are good viable options, one offering attractive rate of interest and the other offering market-linked returns. The choice of one of these products would essentially depend on an individual’s specific needs and risk-taking ability.
(By Saraswathi Kasturirangan, Partner, Deloitte India, and Vivek Mistry, Manager with Deloitte Haskins and Sells LLP)