In Indian scenario, NPS (National Pension Scheme) and EPF (Employees Provident Fund) are two viable options for ensuring a financial cover in the absence of a regular income or as a corpus that can be used in times of need.
However, not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.
Find out how they differ from one another:
|Criteria||National Pension Scheme||Employee Provident Fund|
|A/C opening||Mandatory only for government employees||Mandatory for every establishment employing more than 20 or more employees|
|Eligibility||Age: 18-65 (Indians + NRI) - can be opened by anyone||Only for salaried Individuals|
|Investment||It is a market-linked product. Its performance depends on the equity and debt market||The Central Board fixes the interest rate for the year - government debt investment.|
|Tax Benefit||Tax deduction of INR 2 lakhs under section 80C and CCD||You can avail tax deduction of INR 1.5 lakhs under section 80C|
|Fund Manager||Liberty of choosing your fund manager||Do not have the liberty of choosing a fund manager. The funds are invested by EPFO|
|Min Investment||500/ year||12% of salary per month or 1800, which can be increased voluntarily.|
|Max investment||Unlimited||Unlimited (however, taxability varies)|
|Return||8%-15% ( depending upon which funds you are investing your money in)||8.5% (Interest as on September 1, 2020)|
|Lock in period & Extension||Age: 60|
| Age: 58|
|Premature Withdrawal||Partial withdrawals can be made up to 25% of the subscriber’s savings, but only after the 10th year of subscription.||Partial withdrawal is allowed after 5 years of EPF when you fulfill certain conditions such as buying a new house, marriage, child education, sickness, death, etc.|
|Withdrawal||You will get 60% of the corpus and 40% will be invested in an annuity for a monthly pension. |
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|You will get the entire corpus after retirement.|
|Expense Ratio||0.01% (also varies - it is not fixed)||0% (No expense ratio)|
|Risk||Low risk (Market Dependent)||No-Risk|
|Employer Contribution||Can be done||Employees along with the employers both contribute 12% of the employee’s basic wages towards EPS|
Let’s assume, two friends Sanjay and Yogesh started saving Rs 1.5 lakh for their retirement in 2021. Both of them are 23-years-old and want to retire at 60. Also, they plan to continue this investment until 2058, at the time of retirement. However, Sanjay has invested in NPS and Yogesh in PPF.
|NPS vs PPF: Difference in the retirement corpus|
|Investment Product picked||NPS||EPF|
|Average annual return||12.90% (Growth profile)||8.5%|
|Investment amount every month||INR 5000 (10% of Basic salary & DA)||INR 6,000 (12% of Basic salary & DA)|
|Investment time period||37 years||37 years|
|Investment in 37 years||INR 22.2 lakhs||INR 22.2 lakhs|
|Retirement corpus||Lump-sum value: INR 8.85 crore|
Annuity Value: INR 5.9 crore
|INR 1.28 crore|
NPS is devised as a pension scheme. So, you get to withdraw 60 percent of your accumulated corpus at retirement without paying any taxes. The remaining 40 percent must be converted into an annuity instrument (from an insurance company) and get monthly payments.
The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for EPF has been decreasing. At the same time, there are chances that NPS can give you more than 12 percent returns in the future(where the equity markets perform well). Do note that the higher returns in NPS comes with a higher risk of the equity exposure in NPS.. So, while they reach their retirement age, there is a probability that this difference might increase further.
Opting for EPF or NPS is a matter of choice based on specific needs and projected requirements. Both come with their set of merits and demerits. Subscribers at an early age or with risk-bearing capacity should subscribe to NPS and opt for equity allocation based on their risk profile to accumulate large corpuses targeted to fund retirement needs. Where you believe your risk-taking capacity is not very high and you will find it difficult to manage NPS post-retirement - EPF has always been a classic option for your investments.
However, in both scenarios, investors should not touch their retirement corpus for other financial goals. You should always mark these investments only for retirement.