Then there are those who want to build a larger retirement corpus. For them the issue is not so much EPF versus NPS as how well each accommodates their particular tax bracket and tolerance for risk. The two are designed for different ends and with the rule flexibilities of late, the trade-offs when it comes to access, post-retirement income and growth are more pronounced.
Why the choice now matters
You could say EPF and NPS are at opposite ends of the spectrum. One is about certainty, the other is more inclined to let the market drive growth. Whether you pick one or mix the two will have an impact on the ease of tapping funds prior to retirement and the speed at which your savings compound.
There is also a divergence in the tax breaks and the rules around withdrawal. It is something that will affect what you can keep at exit as well as today’s take-home pay. In many cases, having these levers in order is of more value than trying to wring out an additional percentage point of return.
How the two products are positioned
EPF is a payroll-backed provident fund. An employee will put in 12 per cent of basic wages and dearness allowance and the employer will do the same, though some of the employer’s contribution goes to the Employees’ Pension Scheme. Because the government declares the interest rate, EPF has a certain predictability.
It is more accommodating on the liquidity front as well. Advances can be taken for house construction, marriage, education or illness, among other things. Such flexibility has its worth during one’s working life.
NPS is the market-linked option here. Regulated pension fund managers will invest your capital in equities, corporate bonds and government securities. You are looking at returns from asset allocation and how the market performs rather than a set annual rate.
Returns and risk trade-off
The way NPS is structured is good for long-term growth, particularly for younger investors with time to let it compound. But do not expect a guaranteed final corpus; it will ebb and flow with the markets.
Stability is what EPF is for. The interest rate is fixed by the government and the outcomes are consequently steadier, which is preferable for anyone who does not wish to chase variable returns.
Tax treatment and withdrawal rules
Under the old regime, one can claim deductions on EPF contributions under Section 80C. Provided the conditions and limits are met, the tax treatment on any interest or withdrawals is generally favourable.
Where an employer is also a contributor, the Income Tax Department will consider any interest on employee contributions in excess of Rs 2.5 lakh per year to be taxable.
The NPS operates in its own tax bracket. While eligible put-ins are covered by Section 80CCD, there is scope for an extra deduction of as much as Rs 50,000 under 80CCD(1B). Employer side contributions are deductible too, provided they adhere to the rules of the prevailing regime and salary-linked caps.
Exit procedures have their own set of parameters. The main NPS rule permits a lump sum withdrawal of up to 60 per cent of the corpus at final exit, leaving the rest for an annuity or similar options. But the All-Citizen Model has been made more flexible of late; a normal exit after 15 years or upon turning 60 can see as much as 80 per cent come out as a lump sum, though a minimum of 20 per cent will usually be required for an annuity if the corpus is substantial. It is a matter of the size of the corpus and the route taken.
Most investors tend to look at these practical considerations first:
– EPF calls for 12 per cent from the employee on basic and dearness allowance, with the employer matching that figure, some of which goes to EPS.
– An extra Rs 50,000 can be written off via NPS under Section 80CCD(1B).
– EPF is more accommodating when it comes to advances for housing, marriage, education or illness.
– How one uses the NPS for annuity or withdrawals is dictated by the exit path.
Who should put what first
For those with retirement on the horizon or who find market volatility hard to take, the EPF is the more stable choice and easier to get at. It is well suited to shorter horizons and liquidity requirements.
If there are still decades to run, let the NPS be the growth engine. Professional managers handling the equity and bond exposure will give the corpus room to grow, despite the occasional rough patch.
Then again, it is not always a case of having to choose. A barbell approach has its merits: use the EPF to put down an anchor and the NPS for long-term gains. In time, the combination will likely produce a firmer result than either alone.
Strategy for a bigger corpus
It is wiser to balance access, tax efficiency and stability than to go after the highest notional return. One should start early and review contributions to let compounding have its way.
The objective is money you can actually use, not just a figure on paper. A Rs 1 crore put together in the right instruments is of more value than a larger, unwieldy stack that is difficult to liquidate or tax efficient.
EPF and NPS are different but they complement each other in a retirement portfolio. Match them to your risk tolerance and time frame, stay abreast of any shifts in tax or withdrawal policy and put in more as income allows. Get into the habit of it and the retirement cushion will show for it.
