Is NPS Better Than EPF For Retirement?

Both the National Pension Scheme (NPS) and Employees' Provident Fund (EPF) are government-backed retirement savings schemes in India, designed to provide financial security post-retirement. However, each scheme comes with its own set of benefits, features, and considerations. While both aim to accumulate a retirement corpus, the key differences in terms of returns, flexibility, tax benefits, and eligibility make one more suitable than the other depending on individual needs.

Let's delve deeper into the comparison to understand which option is better for retirement planning.

Key Differences Between NPS and EPF:

Eligibility:

NPS: Open to all Indian citizens between the ages of 18 and 65. This includes both salaried individuals and self-employed individuals.

EPF: Mandatory for salaried individuals working in organizations that have more than 20 employees. EPF is only applicable to those in formal employment.

Contribution and Flexibility:

NPS: Contributions are voluntary, with a minimum contribution requirement of ₹1,000 per year in Tier 1, and you can contribute any amount beyond that. There is also an option to contribute more depending on income levels and retirement goals.

EPF: The contribution to EPF is fixed. Employees contribute 12% of their basic salary and dearness allowance, with an equal contribution from the employer. This is mandatory for employees earning ₹15,000 or more per month.

Returns:

NPS: The returns on NPS are market-linked. The scheme offers a combination of equity, corporate bonds, and government securities, allowing for higher returns (typically around 8-10% annually depending on market conditions). Since it’s linked to the market, returns can be higher over the long term but come with associated risks.

EPF: The EPF offers a fixed rate of return determined by the government (currently around 8% per annum). The return is guaranteed and does not depend on market fluctuations, providing lower risk compared to NPS.

Tax Benefits:

NPS: Contributions up to ₹1.5 lakh per year are eligible for tax deductions under Section 80C, similar to EPF. Additionally, contributions of up to ₹50,000 in NPS are eligible for an additional deduction under Section 80CCD (1B), making NPS more attractive for tax-saving.

EPF: Contributions to EPF qualify for tax deduction under Section 80C. The interest earned on EPF is also tax-free, and the lump sum amount withdrawn at the time of retirement is not subject to tax, provided certain conditions are met.

Withdrawal and Pension Benefits:

NPS: On retirement, 60% of the corpus can be withdrawn as a lump sum, while the remaining 40% must be used to purchase an annuity, which provides a regular pension. However, the lump sum withdrawal of 60% is taxed. NPS also allows partial withdrawals under specific conditions.

EPF: EPF provides the entire corpus at retirement, including both employee and employer contributions, along with interest. The entire amount is tax-free if withdrawn after 5 years of continuous employment. There are also provisions for partial withdrawals for specific purposes like home purchase or medical emergencies.

Risk and Investment:

NPS: Since NPS is market-linked, the returns are variable and depend on the performance of the underlying assets (equities, bonds, government securities). This means that NPS carries a higher risk but also offers the potential for higher returns over time.

EPF: EPF is a low-risk option as it offers fixed returns, and the government guarantees the rate of return. There is no exposure to market volatility, making it a safer, more stable investment option for conservative investors.

Portability:

NPS: NPS is highly portable, meaning you can continue contributing to your NPS account even if you change jobs or become self-employed. It is not restricted to a specific employer or sector.

EPF: EPF accounts are also portable, but the process can be cumbersome if you switch employers. If you change jobs within the same sector, your EPF can be transferred easily, but there may be delays during the process.

Which Is Better for Retirement Planning: NPS or EPF?

When NPS is a Better Option:

• Higher Risk Tolerance: If you are comfortable with market fluctuations and have a long investment horizon (10+ years), NPS can be a better option as it offers higher potential returns.
• Tax Benefits: NPS provides an additional ₹50,000 tax benefit under Section 80CCD (1B), making it more tax-efficient than EPF.
• Portability: If you have a career with multiple job changes or are self-employed, NPS is more suited as it is portable and not employer-dependent.
• Diversification: NPS offers flexibility in asset allocation, allowing you to invest in equity, corporate bonds, and government securities, giving you more control over your retirement corpus.

When EPF is a Better Option:

• Low Risk Preference: If you prefer a fixed and guaranteed return without the risk of market fluctuations, EPF is a safer and more stable option.
• Salaried Employee: If you are employed in the formal sector and earn a steady salary, EPF is an excellent way to build a retirement corpus. Since contributions are mandatory, it helps in accumulating wealth for retirement without additional effort.
• Tax-Free Returns: Since the EPF interest and maturity are tax-free, it is a good choice for individuals looking for a tax-efficient savings tool without worrying about market risks.

Example:

Scenario 1 - NPS for a 30-Year-Old Investor:

Suppose a 30-year-old salaried individual invests ₹10,000 per month in NPS. With a 9% annual return, their corpus could grow to approximately ₹1.5 crore by the time they turn 60. After retirement, they could withdraw 60% as a lump sum (₹90 lakh) and use 40% (₹60 lakh) to buy an annuity, generating a regular pension.

Scenario 2 - EPF for a 30-Year-Old Employee:

If the same individual invests ₹12,000 per month in EPF (6% return assumed), they might accumulate approximately ₹90-95 lakh by the age of 60, including both employer and employee contributions. This entire amount would be available at retirement without tax, and the individual could use it to buy an annuity or invest further.

Conclusion:

Both NPS and EPF are solid retirement options, but which is better depends on your risk appetite, financial goals, and career trajectory. NPS is ideal for individuals seeking higher returns with a long-term, market-linked investment, while EPF is more suitable for those who prefer stability, guaranteed returns, and tax-free interest. Combining both schemes, if possible, can also be a good strategy for building a diversified and secure retirement corpus.