Employee Provident Fund (EPF) and National Pension Scheme (NPS) are two important retirement-savings instruments for workers that assist them construct a tax-efficient corpus. If an worker plans well with both or each, he can retire with a good-looking corpus.
EFP vs NPS
EPF is a scheme run by the Employee’s Provident Fund Organisation (EPFO) to supply social safety and retirement advantages to workers. Employers with 20 or extra workers incomes as much as ₹15,000 month-to-month should contribute to EPF. However, employers can voluntarily contribute even when these situations should not met.
Both the employer and worker contribute 12% of the fundamental wage plus dearness allowance to EPF, with the employer’s contribution at 3.67% for the PF and 8.33% for the pension account. Additionally, employers contribute 0.50% to the Employee’s Deposit Linked Insurance Scheme (EDLI) and 0.50% in direction of administrative prices. For salaries above ₹15,000, the employer’s pension contribution is capped at 8.33% of ₹15,000, with the surplus going into the PF account.
NPS is a voluntary retirement financial savings scheme administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Unlike with EPS, any Indian citizen, worker or self-employed, can be part of NPS individually or by way of an employer.
NPS permits for versatile investments in fairness, authorities bonds and company debentures, and subscribers may also select their pension fund managers (PFMs). It presents two sorts of accounts – Tier I (necessary retirement) and Tier II (voluntary financial savings). Tier II supplies larger flexibility on withdrawals. Tier I accounts haven’t any higher restrict for investments, however at the least ₹1,000 have to be invested yearly. Subscribers can swap between funding choices and fund managers, selecting between lively and auto funding compositions.
What are the returns like?
EPF has traditionally yielded a mean annual return of 8% to eight.5%. NPS presents various returns relying on what the subscriber invests in. Typically, fairness investments yield between 15% and 17%, whereas authorities bonds and company debentures generate 7% to 9% returns. Alternative funding funds present returns within the vary of 6% to eight%.
In the desk, we’ve got in contrast the returns below EPS and NPS of an worker who’s 40 years outdated, and earns a fundamental wage of ₹1 lakh. It is assumed that the contributions to EPF and NPS are equal, and that he’ll retire on the age of 60.
View Full Image
The contribution to the EPF will probably be 12% for every worker and employer. The contribution to the NPS will probably be 10% by the employer and 14% by the worker.
As you possibly can see, NPS has the potential to get you the next pension. However, NPS fits these with greater threat appetites, who do not thoughts accepting market fluctuations in return for greater progress.
Choosing between EPF and NPS thus relies on elements equivalent to your threat profile, desired retirement corpus, and tax planning preferences. EPF presents stability and assured returns, and is appropriate for workers with low threat appetites. NPS is for buyers who need market exposure. Given that markets can usually be risky, it is best to have a balanced retirement technique by investing in each EPF and NPS.
Naveen Wadhwa is vp, Taxmann. Sagar Phukela, an affiliate at Taxmann, contributed to the article.