Financial instruments such as mutual funds, stocks, fixed deposit, actual estate, along with national pension scheme (NPS) and employees’ provident fund (EPF), are some of the most typical avenues looked at by investors to have a smooth and financially secure retirement.
Even even though EPF and NPS are good alternatives for retirement, professionals say each come with their personal set of merits and demerits. For instance, with NPS investors get to pick from 3 investment alternatives- equity, corporate debt, and government bonds, whereas with EPF the investments go in debt instruments predominantly. Hence, with larger exposure to equities in NPS, investing in it can fetch larger returns for investors.
Employees’ provident fund (EPF)
The employee has to make a minimum contribution of 12 per cent of his/her salary per month, which is matched by the employer towards EPS. However, the employee can voluntarily improve their share of the EPF contribution. These contributions are created towards the retirement fund of the employee.
Investing in EPF is not mandatory, for personnel earning more than Rs 15,000 per month, having said that, for these earning under Rs 15,000 have to mandatorily contribute towards it. One can make a complete withdrawal from their EPF corpus when one reaches 58 years of age. Having mentioned that, partial withdrawals can also be created below specific situations such as health-related troubles, property building, education, and so on. but only up to a specific limit.
EPF is tax-absolutely free not only from the accrued interest but also from the accumulation on withdrawal for investments created up to Rs 1.50 lakh below Section 80C, as it falls below the EEE category (Exempt exempt exempt).
National Pension Scheme (NPS)
NPS is not a mandatory contribution scheme, in contrast to EPF. An investor has to open an NPS account on their personal, wherein the minimum contribution is set at Rs 500 in Tier I and Rs 1000 in Tier-II accounts. There is no investment limit set for NPS accounts.
One of the greatest drawbacks of NPS is that following the withdrawal of the corpus as soon as the subscribers attain the age of 60, it is compulsory to invest 40 per cent of the corpus in an annuity program. Subscribers can withdraw the rest lump sum of 60 per cent from their corpus. Also, only following the 10th year of subscription, partial withdrawals can be created by the subscriber up to 25 per cent of his/her NPS savings.
Among tax added benefits, NPS subscribers get complete tax-exemption up to the limit of Rs 1.5 lakh below section 80C, along with tax-exemption of up to Rs 50,000 below Sec 80CCD (1B). Employees can also claim deduction below section 80CCD (2), on the employer’s contribution created towards employees’ NPS account, of up to 10 per cent of the fundamental salary plus DA.
What must you do?
As NPS and EPF each come with their personal merits and demerits, professionals recommend investors must opt for a mixture of each the schemes to take benefit, specially for investors arranging for retirement. Opting for a mixture of each the schemes will advantage with not only the returns from NPS more than EPF but also the zero threat of EPF and taxation added benefits of Rs 2 lakhs, collectively.
Experts say not investing in the proper instrument could imply losing out on the prospective returns of investment. Also, deciding upon one investment tool for such an vital portion of life can be confusing, therefore, it is superior to realize these investment instruments effectively ahead of taking a choice.