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.
source: thehindu.com
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