Priyanka Sambhav
To sail through retirement years, all of us must have a financial plan. We plan for all expected and unexpected expenses – like health emergencies, higher studies, marriage or vacation. But have you planned your pension? If not, then you must start now so that you have a comfortable post-work life.
Employee’s Provident Fund (EPF) and National Pension System(NPS)- are two basic investment tools which should be a part of your investment plan. If you are a salaried person, then in all likelihood you would have an EPF account. The employer and the employee both contribute to EPF, and the employee builds a corpus till he/she retires. But given the condition that jobs nowadays are on shaky ground and if you are dependent on an EPF, then a job loss would mean that the EPF may stop till you find another job. For a situation like this, one must consider a pure pension focused investment like the NPS. Both EPF and NPS promises a retirement corpus, but the approach with the investment is different. Let’s understand the key differences between the two.
How is retirement fund created in Employee’s Provident Fund (EPF)?
An employee makes a minimum contribution of 12 per cent of their salary per month. At the same time, the employer also matches the contribution and contributes up to 12 per cent of the employee’s basic wages. The employer contributes 8.33% towards employee’s EPS (Employee Pension Scheme) and the remaining 3.67% towards EPF. The Employee Provident Fund Office (EPFO) pays a quarterly interest on the PF account of an employee. The PF investment goes in debt instruments.
How is retirement fund created in the National Pension System(NPS)?
NPS is a voluntary, defined contribution scheme. You have to invest up to the age of 60 years. An investor opens an NPS account on their own through banks or eNPS portal. The minimum contribution for NPS is Rs 500 in Tier I and Rs 1000 in Tier-II accounts. There is no maximum limit for NPS account. NPS is a market-linked product, where the performance of your portfolio will depend on the fund you choose. The funds’ performance will mirror the performance of equity and debt markets. NPS offers three options of investment – equity, corporate debt and government bonds.
Maturity & Withdrawals
The EPF matures when the investor attains 58 years of age. The full amount can be withdrawn post 58. Partial withdrawals are allowed under certain circumstances such as house construction, education, medical issues, etc. but only up to a particular limit. In case of unemployment if an individual remains unemployed for one month he/she can withdraw 75% of the corpus and the balance 25% can also be withdrawn if the member remains unemployed for more than two months.
An NPS subscriber can withdraw a lump sum of 60% from their corpus when he/she reaches the age of 60 years. The remaining 40% gets invested in an approved annuity plan. NPS allows three partial withdrawals but only after three years of account opening. Withdrawals can be made for specific issues like health, education etc. These withdrawals can’t exceed 25% of your contribution.
Taxability of EPF and NPS
EPF gives you EEE (Exempt Exempt Exempt) benefit, not only the accrued interest but also the withdrawal of maturity is tax-free. The investment made up to Rs 1.50 lakh allows you Section 80C deduction of the IT act.
NPS subscribers also enjoy tax-exemption up to the limit of Rs 1.5 lakh under section 80CCD(1) of the IT Act within the overall ceiling of Rs 1.5 lakh allowed under Section 80C. In addition to this , section 80CCD 1 (B) tax-exemption of up to Rs 50,000. The employer’s contribution made towards employees’ the NPS account, will give deduction under section 80CCD (2), of up to 10 per cent of the basic salary plus dearness allowances.
