It takes time and consistency to generate a comprehensive retirement corpus and for this, you must invest in a long-term investment vehicle so that the cumulative potential can serve you and allow you to set your massive retirement corpus. There are some long-term financial strategies that can help you prepare for your retirement, such as EPF, PPF, NPS, etc. As both inflation and living expenditures are increasing, it is now a prerequisite to invest more to enjoy a financially comfortable post-retirement lifestyle. You need to prepare early and start investing 25-30 years before your retirement to make sure that you will sustain your retirement lifestyle in a more luxurious way. A retirement-oriented investment with tax-saving benefits is the Employee Provident Fund (EPF).
At the current scenario of rate cuts, an interest rate of 8.5% is currently offered by the Employees Provident Fund Organisation (EPFO) which is much higher than bank FDs. The National Pension System (NPS), on the other side, can also be considered as one of the finest retirement investment vehicles. NPS bids its subscribers with three portfolio options: equity, corporate debt, and government bonds. In contrast, investing in NPS can deliver excellent returns because it enables its investors to be more responsive to equities that can give double-digit yields. Since both tools offer tax deductions as well as decent returns, it can be difficult to pick one investment instrument in general. It is important to make the correct selection and if you do not invest in the right tool you may miss the potential returns. For example, while EPFO invests primarily in debt instruments, investing in NPS offers better long-term returns due to the alternative of equities.
Comparison between NPS and EPF
- Professionals earning more than Rs 15,000 a month are not required to invest in the EPF, whereas those earning less than Rs 15,000 are required to make a necessary contribution to it. Coming to the NPS, it is absolutely optional to invest in it.
- In the context of the EPF, an individual is required to make a minimum monthly deposit of 12% of his or her basic salary which can be voluntarily raised under the VPF too. For NPS, the minimum deposit is Rs 500 in Tier I and Rs 1,000 in Tier II, and no overall cap is specified.
- Employees and employers also contribute 12% of the basic salary of the employee in EPF. On the other side, NPS is a voluntary investment plan, and on their own, salaried professionals can open an NPS account online and offline.
- In the instance of the EPF, once the investor hits 58 years of age or at retirement, the full corpus can be withdrawn. A lump amount of up to 60% of their corpus can be withdrawn once the subscribers reach the age of 60, as it is mandated to park the outstanding 40% balance in the annuity plan in case of NPS.
- Under certain conditions such as education, housing construction, health complications, and so on up to a certain amount, partial withdrawals under the EPF are permissible. Up to 25 percent of the subscriber's investment can be partially withdrawn, but only after the 10th year of subscription when it comes to NPS.
- The EPF comes under the EEE classification, implying that the contribution, interest received and the amount of maturity are completely free from tax. The amount of EPF is tax-free from interest earned and withdrawal accumulation for contributions rendered up to Rs 1.5 lakh pursuant to Section 80C.
- NPS subscribers can even enjoy tax deduction under section 80C up to the cap of Rs 1.5 lakh and under Sec 80CCD (1B) an additional Rs 50,000. In addition, professionals can seek an exemption of up to 10 per cent of the basic salary including dearness allowances under section 80CCD (2) on the employer's contribution towards the NPS balance of employees.
There is no single way to react when it comes to opt between these tools, as the decision relies on an individual's financial priorities, desires and risk-appetite. Both of these can be considered completely for retirement option but the EPF pension is free from market dynamics and an investor can easily predict his or her potential returns compared to NPS.