Money
NPS or EPF: Which is better for retirement planning?
EPF is an employee benefit scheme (only salaried individuals get EPF benefits), whereas any individual in any profession or work structure can use NPS to save up for their retirement.
Most salaried individuals have access to two broad retirement-specific instruments to build their nest-egg. One is Employees’ Provident Fund (EPF) and the other is National Pension System (NPS).
Between March 2021 and February 2022, the Employees’ Provident Fund Organisation (EPFO) added 1.11 crore subscribers, while the NPS enrolled 93.6 lakh over the entire FY 2021-22. Even though most companies offer EPF, there are also income-tax benefits that NPS offers. Which one works better?
Equities compound wealth, tax benefits nudge investments
Both investments are aimed at saving up for your retirement. Hence, they discourage early withdrawals. That’s not bad given that both investments are meant to compound over decades to create a kitty which you can utilise post your retirement when regular income stops.
The big difference in here: EPF is a defined benefit plan where the emphasis is on the returns that EPF makes every year. The government of the India guarantees its returns. When you reach your retirement, you get a lumpsum amount.
NPS is a defined contribution plan, where your money gets deployed in equity and debt markets. The idea is that your systematic contributions every month compound at market rates, enough to pay you a regular- and hopefully handsome- pension after you retire. EPF is an employee benefit scheme (only salaried individuals get EPF benefits), whereas any individual in any profession or work structure can use NPS to save up for their retirement.
NPS offers you a bit more flexibility. It allows you to choose how much money you want to put in equities; the maximum is 75 percent of your monthly contribution. In EPF, there is no control on where your money gets invested — the fund can invest between 5 percent and 15 percent of the corpus in equity.
According to Khyati Mashru Vasani, Founder – Plantrich Consultancy LLP, “Wherever it’s relevant and possible we encourage clients to invest some in both. The objective is different; EPF being guaranteed income works better for the necessary retirement expenses and NPS works better in planning for the negotiable expenses.”
There are tax incentives for both EPF and NPS. For both, you can get a deduction from taxable income, of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, for the amount being invested. For NPS you can get an additional Rs 50,000 worth deduction under section 80CCD (1B).
Vasani says that while clients opt for NPS mostly for the additional tax benefit, as there is no restriction on contributions, it may be useful to invest higher amounts depending on the retirement plan. At maturity, you can withdraw 60 percent of the NPS fund tax-free. In case of EPF, the maturity proceeds are tax-free, but interest earned on annual contributions in excess of Rs 2.5 lakh will be taxable.
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