The NPS is more complicated than EPF, but it may
ensure a sufficient retirement kitty
If there’s one investment option that has received
generous tax breaks in the Budget, it is the National Pension System (NPS). In
a watershed move, the Finance Minister has also announced that employees in the
organised sector will now be able to opt out of contributions to the Employees
Provident Fund (EPF) and invest in the NPS instead. So, if given this choice,
what should you do? Here’s how they compare.
Contributions
EPF contributions are mandatory for employees
earning up to ₹15,000 a month in the organized sector. Many
employers however insist on EPF contributions for all their employees. The
contribution is pegged at 12 per cent of your pay (basic plus dearness
allowance). Your statutory EPF contributions are matched by your employer. If you are an employee who usually struggles to
save, the EPF is a good option for you as it forces you to save at least 12 per
cent of your pay.
But if you are targeting a comfortable retirement,
note that EPF alone won’t be enough as it is pegged only to your basic pay. The
NPS is a voluntary account; you can contribute anything starting from ₹500
a month (₹6,000 a year).
To avail of the tax breaks on the investment, the
maximum limit is ₹2 lakh a year. Unlike the EPF, the NPS allows you to skip contributions for a few months if you can’t afford it
(investing once a year is mandatory).
So, the NPS scores over the EPF on two counts — you
can save much more and do it with greater flexibility. But currently all your
EPF contributions are matched by your employer. Not so for the NPS.
Portfolio
The money you pay into EPF is invested in ultra-safe
options — Central and State Government securities, bonds and deposits from PSUs
and a special deposit scheme from the Government. Last we know, G-Secs made up
40 per cent of the portfolio, PSU debt 32 per cent, with the deposit making up
the rest of the EPF kitty. The EPF doesn’t actively manage its portfolio — it
mostly buys and holds till maturity. This makes for low but predictable
returns.
The key differentiator with the NPS is that it
allows you to add an equity component to your retirement kitty. You also get to
flexibly allocate your money between equities (up to 50 per cent), liquid
funds/bonds and Government Securities (G-Sec) in any proportion you like.
You also have the choice of deciding who, among the
six pension fund managers, will manage your money. Their individual track
records are available on their websites.
You can rejig allocations once a year and also
change your fund manager. Both the equity and the debt portions of the NPS have
delivered double-digit returns in the last one year. But because they are
invested in market instruments, your returns will fluctuate from year to year.
The G-Sec portion, for instance, delivered negative
returns during the rising rate scenario, but is faring well with falling rates.
Given that you are looking at the NPS as a long-term option, you need not worry
too much about shorter term losses in the debt portfolio. Due to its portfolio
structure, the NPS is likely to earn higher returns but with greater
variability.
Returns
The interest you earn on your EPF account is
decided by the EPF trustees who announce the rate every year. In the last four
years, interest rates have been 9.5, 8.25, 8.5 and 8.75 per cent, respectively.
The returns on NPS depend on your asset allocation
as well as choice of fund manager. If you choose a 30-50 per cent equity
component, returns are likely to be in the double-digits, even assuming
equities manage only 15 per cent a year and debt securities 8 per cent.
Disclosures
The EPF’s portfolio is not made public. But it is a
government-backed scheme and the presumption is that it will not default on any
payments. Returns are also announced and well-publicised.
With the NPS, you know exactly where it invests,
with all the managers regularly disclosing their portfolios. But unlike the
EPF, gauging NPS returns is not easy. Returns earned by different
plans/managers are not available at one location. You need to compile them
individually from the historical NAVs put out by the different fund managers.
So, the EPS is your best bet if you like to know
exactly what you’re earning. The NPS works if you don’t mind leaving it to
market forces.
Liquidity
The EPF allows you to withdraw your money before
retirement if you resign from one job and take up another, after a gap. You can
also draw money from it for constructing/buying a home, illness, marriage or
education of children. You can use the sums withdrawn for these purposes.
In the NPS, if you withdraw before the age of 60,
you need to compulsorily use 80 per cent of the proceeds to buy an annuity plan
from an insurer. Even withdrawals after the age of 60 require you to use 40 per
cent to buy an annuity. Only 60 per cent will be available to you to deploy as
you please.
The EPF is certainly more flexible than NPS on
early withdrawals. But withdrawing too much or too often can leave you short of
a retirement kitty when you most need it.
Taxability
Contributions to the EPF are tax-free under Section
80C. Interest earned and withdrawals aren’t taxed either, unless you do so within
five years of starting the account.
Investments in the NPS, up to ₹2
lakh are tax-free. But the sums you withdraw at retirement are taxable at the
prevailing income tax rates.
