Comparing NPS and EPF: A comprehensive guide

Many tend to spend hours planning their annual trip abroad than their retirement. While your retirement date might still be many years away, it is never very early to begin preparing. In India, there are various investment options that allow you to save for your post-retirement years. Out of the many, Employee Provident Fund (EPF) and National Pension System (NPS) are the most popular retirement financial options. And here is a comparative analysis between the NPS scheme and EPF to help determine the best choice of investment for your retirement.

What is the NPS scheme?

NPS is a government-backed voluntary pension scheme. Your investment corpus here is market-linked, which allows you to earn better returns over the long term.

The online NPS account opening procedure is very simple, which makes it a feasible option to generate a post-retirement corpus over the long term. All you must do is first compute the corpus you require for your retirement through an online pension scheme calculator. After you are aware of the figures and the monthly contributions you need to make to accumulate the retirement corpus, select the NPS account opening option.

For this visit the-NPS portal, hit on the ‘registration’ option, fill out the required details, and input the OTP generated on your registered number. After this, a Permanent Retirement Allotment Number (PRAN) will be allotted. Next, select the ‘e-signature’ button and an OTP on your registered mobile number will be generated again. You must input this OTP to authenticate your signature and begin with your NPS contribution online.

Once you open your NPS account, you must voluntarily make your contributions to accumulate adequate corpus, for which you can claim tax deductions under section 80C and section 80CCD(1B) of the Income Tax Act, 1961.

What is EPF?

EPF is a government-backed financial instrument designed to meet the monetary requirements during retirement of those employed in organised sectors. If you are covered under this scheme, then you are required to contribute a specific percentage of your salary towards the EPF, and an equal contribution amount shall be parked by your employer.

Under the EPF scheme, you are supposed to make a fixed contribution of 12% of your basic salary and dearness allowance. As of now, the interest rate on EPF is 8.15%. So, unlike NPS, EPF is a fixed-income instrument that assures a fixed return.

NPS vs. EPF: Which option is better?

One of the major distinctions between EPF and NPS is that only employees, through their workplace, can invest in EPF accounts. However, in the case of NPS, anyone except for those working in the defence forces can invest in NPS. Other differences are mentioned in the table below.

Particulars EPF NPS
Tax deduction Tax deduction of up to Rs 1.5 lakh per annum is allowed under section 80C. A tax deduction of up to Rs 1.5 lakh per annum is allowed under section 80C. Also, an additional tax deduction of Rs 50,000 is available under section 80CCD (1B).
Contribution type Mandatory for those with a basic salary + dearness allowance of less than Rs 15,000, while for others this option is voluntary. Voluntary
Minimum contribution 12% of basic salary and dearness allowance per month. Rs 1,000 annually for tier I account and Rs 250 for tier II account.
Returns Currently 8.15%. Based on the market levels. Owing to its market-linked nature, the instrument has the potential to generate higher returns than EPF over the long term.
Sum on maturity Withdrawal of 100% of the matured amount is allowed once you attain the age of 58 years. Withdrawal of 60% of the matured amount is allowed upon attaining the age of 60. The remaining 40% must be invested in an annuity scheme.
Taxation rule EPF scheme is EEE (Exempt Exempt Exempt) in nature. This means the accumulated amount and the interest generated is tax exempt. 60% of the maturity amount is tax-free. The remaining 40% that needs to be invested in an annuity scheme will be taxable, as per your income slab tax rate, when you receive the annuities.
Risk involved As EPF is a fixed-income instrument. Returns on NPS are market-linked and thus to make the most out of your investment, you must ensure to remain invested for the long term.

Wrapping up

NPS and EPF are both prudent financial instruments for retirement planning. They differ based on various aspects including risk appetite, expected returns, taxation rules, asset allocation, etc., and you can consider investing in both instruments to diversify your retirement investments. This way you avoid concentrating your investments in just one financial instrument and effectively build a retirement corpus.

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