“More than 47% of our young working citizen’s have saved nothing for retirement.” Another 40% have not saved enough for retirement”. Are you one of these citizens? If you are, it’s time to do something about it. Even if you don’t care to save and invest for retirement, the Government will not let you get away with it.
If you are a salaried employee earning a basic salary up to INR 15,000, you have to compulsorily contribute 12% of your basic salary to the employee provident fund, popularly called EPF. Your employer makes an equal contribution to this account. EPFO currently pays an interest of 8.65% a year, on the money invested in the EPF.
New Pension Scheme also called NPS, is a Government approved Pension Plan. You can invest in the NPS, if you are between 18 to 60 years. NPS allows you to invest up to 50% in equity. You can withdraw only 60% of the amount at maturity. The remaining 40% is compulsorily invested in an annuity plan. An annuity is a pension product which gives a steady income in your retirement years.
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You get a tax deduction under Section 80C up to INR 1.5 Lakhs a year, on your investment in the NPS. Your contribution to the EPF also enjoys the same tax benefit. So there’s no difference here. You get a tax deduction of INR 50,000, under Section 80CCD(1b) of the income tax act, on your voluntary contribution to the NPS. EPF does not give you this benefit.
If your employer contributes up to 10% of your (basic salary + dearness allowance), towards the NPS scheme in your name, you would get a tax deduction under Section 80CCD(2). EPF does not have this benefit.
EPF scores over NPS at withdrawal. EPS enjoys the EEE benefit. The amount you invest, the returns you earn and the amount you withdraw at maturity, are tax free. NPS only enjoys the EET benefit. Out of the amount you withdraw at maturity, only 40% is tax free. Another 40% is compulsorily locked in an annuity plan. The remaining 20% is taxed. There are ways to reduce your tax liability in the NPS. But, if your investment in NPS is large, it’s not possible to reduce tax liability beyond a point.
If NPS is to become a very good investment for retirement, the withdrawals you make at maturity must be tax free. The Union Budget 2017 may consider making NPS withdrawals at maturity tax free and bring it at par with EPF.
You can withdraw only 60% of the amount accumulated in the NPS at maturity. The remaining 40% has to be compulsorily invested in annuity.
Annuity is a pension plan offered by Life insurers. You get an income for the rest of your life. Annuities do not give very high returns and payments you receive from the annuity plan are taxed.
EPF does not force you to invest in an annuity plan. You can withdraw the entire amount at maturity and do whatever you want with it.
If you withdraw from the NPS before retirement/maturity, you have to compulsorily invest 80% of the accumulated amount in an annuity plan.
You can exit from the EPF while switching jobs and get the entire amount you have contributed + interest. You can withdraw this money, only if you are unemployed for more than 60 days. You can withdraw employer contribution to your EPF only at 58 years. If you have contributed to the EPF for at least 5 years, the amount you withdraw is tax free.
If you want to retire early, EPF is better than NPS.
NPS will never have the kind of political power, EPF enjoys. In the Union Budget 2016, the Government proposed to tax the amount withdrawn from EPF at maturity. When citizens protested, the Government was forced to withdraw the proposal. There would not be much of a protest, if the Government changed rules, pertaining to the taxation of NPS.
So which is a better retirement product? Is it NPS or EPF? Both of them are very good investments and complement each other. However, EPF enjoys a slight advantage over NPS, when it comes to taxing the maturity amounts. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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