EPF or NPS: which one is a better retirement saving option for the people in their early 20s?
Employees' Provident Fund vs National Pension System
What is Retirement Planning?
Retirement planning is the process of planning and managing your short and long-term finances to help achieve your financial dreams both during your working years and retired life. It involves analyzing your financial objectives, current financial position, and expected future cash flow to develop a comprehensive retirement roadmap.
One should start planning for retirement from the first cheque itself. If you start contributing early for this purpose you can build sizable amount in your retirement kitty. I am happy to now that you are thinking of Retirement planning in your 20s. As you are planning early you have a lot of time by your side. You will get a huge benefit of compounding effect which will help you to multifold your retirement kitty.
There are many products which can be used as retirement products but EPF,PPF and NPS are the most popular as Debt category products.EPS is available for only salaried persons whereas NPS and PPF can be opened by all. So SALARIED person can have all three in his kitty for retirement planning.
Let us study EPF and NPS in details.
EPF: Employees' Provident Fund came into existence with the Employee Provident Fund Ordinance on the 15th Nov 1951. It was replaced by Employee Provident Fund Act 1952. Employee Provident Fund (EPF) acts as a saving tool for the employees. The employee and the employer contribute an equal amount towards savings that can be availed upon retirement or after switching jobs.
NPS is a relatively new product. It was launched on 1st January 2004. National Pension System (NPS) is a pension cum investment scheme launched by Government of India to provide old age security to Citizens of India. It brings an attractive long term saving avenue to effectively plan your retirement through a safe and regulated market-based return. The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA).
- EPF: An employee has to contribute 12 percent of basic wages towards EPF. A matching contribution is made by the employer.
- NPS: NPS is a voluntary defined-contribution scheme (only for non-government employees) under which an employee has to contribute 10 percent of the salary plus dearness allowance as a mandatory monthly contribution and a matching contribution can be made by the employer. You can open an NPS account on your own also.
- EPF: The Employees Provident Fund Organisation (EPFO) has recently raised the interest rate on Employees Provident Fund (EPF) to 8.65 percent for the financial year 2018-2019 from 8.55 percent for the year 2017-2018.
- NPS: NPS is a market-linked product, where the performance of your portfolio will depend on the fund you choose and performance of equity and debt markets. There are eight fund managers to choose from. It will also depend on allocation to different asset classes such as debt, equity, and corporate bonds.
- EPF: Returns from EPF are guaranteed and backed by the government. So, there is no question of loss of capital.
- NPS: NPS returns are market-linked and nothing is guaranteed. Therefore, over short-term, NPS may face some loss of capital if equity markets are not doing well but over long-term the chances of equity delivering losses are low. Also, the debt portfolio investment in case of NPS is subject to the interest rate risk and credit risk.
- Asset Allocation:
- EPF: EPFO mainly invests in debt securities and has started taking exposure in equities, which has been raised to 15 percent recently.
- NPS: Under NPS, the subscriber has an option to go up to 75 percent in equity until 50 years of age, under NPS, the subscriber has the option to choose the fund manager as well as the allocation they want in different asset classes --equity, corporate debt, government securities, and alternative assets (within the prescribed limits).
- EPF: EPF falls under the exempt, exempt and exempt (EEE) category that is the investments made up to Rs 1.50 lakh under Section 80C, the interest accrued and the accumulation on withdrawal are all tax-free.
- NPS: NPS has recently received the much-awaited EEE tax status, thus bringing it at par with EPF. Now, if you invest in NPS, the investments up to Rs 1.5 lakh under section 80C and Rs 50,000 under Sec 80CCD (1B) are tax exempt. An employee can also claim a tax deduction on the employer's contribution up to 10 percent of the basic salary plus dearness allowances. There is no upper limit on the amount of deduction. The government has also made NPS withdrawal after retiring completely non-taxable. Earlier, out of the 60% withdrawal allowed, only 40% was tax-free.
So which one is better EPF o NPS?
EPF and NPS are both good options. EPF offers guaranteed returns and is a debt-heavy investment, while NPS is a low-cost product, which gives the flexibility to have a higher allocation to equity for building a retirement corpus.
For most of the salaried people, not investing or opting out of EPF is not possible as it is part of the salary. If you want to invest in NPS you can open an account on your own through point-of-presence (PoP).
Basis the risk profile, you can decide on the allocation between NPS and EPF.
If one should invest in EPF or NPS, it differs from client to client based on their age and the years left for retirement. If a client is aged below 40 years and has many years before retirement, higher exposure to equity in NPS vs EPF makes more sense considering a higher exposure to equity could help accumulate a larger corpus by retirement.
However, if you are above 40 years, you might want to divide between NPS and EPF. If you are close to retirement then the higher allocation to EPF helps given assured returns of EPF.
So have both in your kitty to accumulate maximum wealth for Retirement.
SEBI Registered Investment Advisor and Fee only Financial Planner