There are multiple instruments to save for retirement. If you are planning to create a sizable post-retirement fund, both the National Pension Scheme (NPS) and Employee Provident Fund (EPF) are good choices. Both EPFO, manager of EPF, and NPS invest your money across equities and debt and are overseen by the government. But they have their own set of merits and demerits.
NPS is a government-sponsored social security scheme. Employees working in the government except armed forces staff, private, public, and unorganised sectors can subscribe to this scheme. The subscribers may choose to withdraw a certain percentage of the corpus once they retire, and the remaining amount will be paid out as a monthly pension.
On the other hand, EPF is a retirement savings scheme for salaried professionals. It is a savings platform that enables employees to save a portion of their monthly salary for use upon retirement or unemployment. A large number of salaried professionals heavily rely upon the accumulated sum in their EPF accounts for post-retirement stability.
In terms of returns, there is a major difference between EPF and NPS. EPF provides guaranteed tax-free returns in the form of annual interest on the sum deposited in the EPF account. On the other hand, NPS offers market-linked returns.
The rate of interest on EPF is determined by the government every year. So the expected return is fixed. The Employees’ Provident Fund Organisation, the fund manager, announced 8.5% interest rate for the financial year 2020-21. The returns depend on market volatility.
Another fundamental difference between NPS and EPF is that while EPF is only meant for salaried employees working in the private sector, NPS is open to any Indian citizen, even self-employed individuals, of 18-70 years of age.
In NPS, every fiscal year, you must contribute a minimum of Rs 1,000 for Tier I and Rs 250 for a Tier II account. There is no upper limit.
For EPF, the contribution is restricted to 12% of basic monthly salary. However, an employee can also choose to make additional voluntary contributions to his EPF account to make a bigger corpus.
For partial withdrawals, in case of NPS, you must meet certain specific conditions. You can withdraw a maximum of 20% of the corpus before you turn 60 years old.
In case of EPF, a larger amount of the contribution can be withdrawn under certain circumstances.
The entire maturity sum can be withdrawn from an EPF account on maturity. While, in the case of NPS, it is mandatory for 40% of the matured amount be invested in annuities.
EPF offers tax deduction under section 80C of the Income Tax Act while NPS enjoys full tax exemption up to the limit of Rs 1.5 lakh under section 80C. Under section 80CCD (1B) subscribers also get tax-exemption of up to Rs 50,000.
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