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Build Your Financial Future: A Guide to Utilizing NPS and EPF Wisely

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Build Your Financial Future: A Guide to Utilizing NPS and EPF Wisely
February 26, 2024

Table of Content

 

NPS & EPF are two great retirement plans that often come up when one thinks of building a considerable retirement corpus. Retirement planning is a significant and integral part of financial planning. Many individuals begin to save for their post-retirement years early on. 

An early start gives them the advantage of compounding. For long-term retirement planning, the Government of India offers several retirement plans. The Employee Provident Fund (EPF) and National Pension Scheme (NPS) are the primary investment schemes for corporate employees.

While both EPF and NPS are retirement schemes, there is still much to understand about them. If you too want to build a significant retirement corpus and a stress-free financial future, this article is a must-read for you. Listed below are the unique features and benefits of both NPS & EPF. 

A detailed understanding of these retirement plans will help lend clarity on how to invest for your golden years. 

What is NPS? 

The National Pension Scheme (NPS) is a long-term retirement planning scheme. The government-backed scheme is open to all individuals except for personnel of the Indian Armed Forces. 

The scheme was launched in 2004 for government-sector employees to enable them to accumulate a corpus for post-retirement expenses. However, the key features of the scheme were later revised in 2009, and it was made available to individuals from all sectors with the objective of promoting financial inclusion in the country. 

As the scheme encourages a habit of saving among individuals, it allows subscribers to invest small amounts regularly that get accumulated in the individual's pension account. The entire NPS scheme is managed by Fund Managers who are authorized by the pension regulators. The fund is invested in different market-linked financial instruments. The growth witnessed in such investments reflects an addition to the individual’s NPS corpus. 

NPS features two types of accounts — Tier 1 and Tier 2. Tier 1 NPS account has a mandatory lock-in period until the subscriber turns 60 years of age. The annual contribution amount is pre-calculated and fixed. The Tier 1 account offers benefits under the Section 80C of the Income Tax Act. 

Upon maturity of a Tier 1 account, 60% of the accumulated corpus can be withdrawn as a lump sum, and 40% can be used to buy an annuity plan. Alternatively, you can use the entire corpus to buy an annuity plan and start to receive pension 1. However, the annuity option is not a compulsion in EPF, representing a major difference between EPF and NPS. 

The key features of NPS can therefore be tabulated as below:

Parameter

National Pension Scheme (NPS)

Nature Of Scheme

It is a voluntary scheme 

Eligibility 

Available to all individuals, except for personnel of the Indian Armed Forces.

Type Of Investment 

Market-linked financial instruments

Return On Investment 

Return is variable; depends upon the fund’s performance

Minimum Investment 

Rs. 6000 p.a. in NPS Tier 1 account

Maturity Proceeds

Upon maturity,  a maximum of 60% can be withdrawn as a lump sum. The remaining 40% must be compulsorily invested in an annuity scheme. The annuity investment can increase up to 100%. 

Premature Withdrawal

Up to 25% of the contributed amount can be withdrawn after the completion of a 3-year mandatory lock-in period. Premature withdrawals are allowed only for specific reasons. 

Asset Allocation

The subscriber chooses allocation into various asset classes depending on risk appetite 

Income Tax Implications

 

Directly linked to the financial budget announcement

A contribution of up to Rs. 1.5 lakh with an additional contribution of up to Rs 50,000 can be claimed as an exemption from tax per year. 

 

The lump sum withdrawal is tax-free.

 

The total amount diverted to the purchase of an annuity is tax-free. However, the annuity income is taxable as per income tax slabs. 

Risk Appetite 

NPS investment is market-linked and, therefore, subject to market risk. 

What is EPF?

The Employee Provident Fund (EPF) is a saving-cum-investment scheme that allows people in the organized job sector to save methodically for their post-retirement financial needs. The retirement savings scheme is managed by the Employees’ Provident Fund Organization of India. 

Under the EPF scheme, the private sector employees contribute a certain part of their gross salary to their EPF account every month. It is a contributory account wherein the employer contributes the same amount. However, the employee can voluntarily decide to contribute at a higher rate. However, the employer is under no obligation to match the employee contribution over the fixed limit. 

The entire EPF account balance earns a specified rate of interest that is announced from time to time (current 8.15% p.a.) Upon retirement, the EPF subscriber can withdraw the entire corpus that comprises both the deposit contribution and the interest earned on it. 

The key features of EPF can therefore be tabulated as below:

Parameter

Employee Provident Fund (EPF) 

Nature Of Scheme

It is a mandatory scheme 

Eligibility 

It is for employees of private sector companies that employ 20 or more employees.  

Type Of Investment 

Annual rate of interest

Return On Investment 

Guaranteed and fixed 

Minimum Investment 

12% of the monthly Basic Salary + DA

Maturity Proceeds

The entire EPF account balance is withdrawable after the age of 58 years. 

Premature Withdrawal

Up to 75% of the EPF corpus can be withdrawn if the subscriber is rendered jobless for a period of more than one month or for a genuine reason. 

Asset Allocation

Asset allocation is beyond the purview of EPF subscribers

Income Tax Implications

 

Directly linked to the financial budget announcement

The EPF accounts come under the EEE category. 

 

Contributions of up to Rs 1.5 lakhs per year are tax-free. The interest earned on the EPF balance is tax-free, and there is no tax liability on withdrawals. 

Risk Appetite 

It is a government-backed scheme. It is safe with no risk involved. 

EPF or NPS: Is the comparison justified?

The NPS Vs EPF comparison is interesting, often confusing and actually unjustified. The difference between NPS and EPF lies in their investment strategy. However, these schemes cannot be compared because they are absolutely different investment instruments that encourage individuals to save regularly and systematically for their post-retirement needs. 

EPF provides a safe and guaranteed rate of return, while the NPS is a market-linked investment scheme. The return on NPS investment depends upon the risk appetite of the subscriber. 

The NPS scheme has the potential to offer better returns over the long run as it allows the subscriber to choose the asset class by selecting a fund of choice. However, the returns from an EPF scheme are entirely tax-free, with tax benefits and implications on the NPS corpus.  

Therefore, carefully analyzing investment goals and understanding the financial needs is important before selecting a retirement savings scheme. 

FAQs

Q: Can I have EPF and NPS both?

Yes, private sector employees who have an EPF account can also subscribe to an NPS account. 

Q: Is NPS good for private sector employees?

The Corporate NPS model allows private sector employees to save regularly over and above the mandatory EPF scheme. Together, they help accumulate a bigger retirement corpus. Because of the basic difference between NPS and EPF, subscribing to both schemes can help in diversification. 

Q: Are NPS and EPF enough for retirement?

NPS and EPF are retirement savings schemes. When started at an early age, a regular contribution in both schemes helps accumulate a substantial retirement corpus. 

Q: Is NPS tax-free on maturity?

The NPS tier 1 account matures at age 60. Up to 60% of the fund value can be withdrawn. This component is tax-free. The balance amount must be invested in an annuity plan. The income earned through the annuity plan is taxable under the applicable tax slabs.

Q: Which is best, NPS or EPF?

There is no comparison between the two schemes. The first thing to remember is that both are retirement savings schemes. EPF offers guaranteed returns, while NPS is market-linked. But they both complement each other to create a substantial retirement corpus. 

Conclusion

Both the Employee Provident Fund and the National Pension Scheme are government-backed retirement schemes. The EPF is a compulsory pension account for employees in the Private sector. It earns a fixed rate of return and matures when the subscriber turns 58. The proceeds are completely tax-free.  

The NPS is a voluntary retirement investment vehicle. All individuals, except for personnel of the Indian Armed Forces, can subscribe to an NPS account. As the NPS scheme is a market-linked investment, it offers growth potential subject to market risk.  

Therefore, as an investor, you can pick one based on your retirement goals, risk-taking ability, and tax liability. You could even invest in both as they are two absolutely different savings instruments. Explore and research different types of retirement plans and wisely choose the one that best fulfils your current financial standing and retirement goals. 

Annuity Service Providers:

PFRDA is a statutory body set up by the Government of India to regulate and develop the pension sector in India. An annuity pension is a type of pension in which the pensioner receives a fixed monthly income as per terms and condition of the plan

The relationship between PFRDA and ASPs (Annuity Service Providers) is that PFRDA is the regulator of the National Pension System (NPS), and ASPs are the entities that provide annuity services to NPS subscribers. When an NPS subscriber reaches the age of 60, they are required to annuitize at least 40% of their pension wealth. They can do this by purchasing an annuity from an ASP that is empanelled by PFRDA

You can select any of the annuity schemes offered by Annuity Service Providers (ASPs) registered with IRDAI and empaneled with PFRDA. HDFC Life is one of the registered ASPs for annuity issuance and further servicing.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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