Not investing in the right instrument could mean losing out on the potential returns of investment. Also, choosing one investment tool for such an important part of life can be confusing, hence, it’s better to understand these investment instruments properly before taking a decision.
Financial instruments such as mutual funds, stocks, fixed deposit, real estate, along with national pension scheme (NPS) and employees’ provident fund (EPF), are some of the most common avenues looked at by investors to have a smooth and financially safe retirement.
Even though EPF and NPS are great options for retirement, experts say both come with their own set of merits and demerits. For instance, with NPS investors get to choose from 3 investment options- equity, corporate debt, and government bonds, whereas with EPF the investments go in debt instruments predominantly. Hence, with higher exposure to equities in NPS, investing in it can fetch higher 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 increase their share of the EPF contribution. These contributions are made towards the retirement fund of the employee.
Investing in EPF is not mandatory, for employees earning more than Rs 15,000 per month, however, for those earning below Rs 15,000 have to mandatorily contribute towards it. One can make a full withdrawal from their EPF corpus when one reaches 58 years of age. Having said that, partial withdrawals can also be made under certain circumstances such as medical issues, house construction, education, etc. but only up to a certain limit.
EPF is tax-free not only from the accrued interest but also from the accumulation on withdrawal for investments made up to Rs 1.50 lakh under Section 80C, as it falls under the EEE category (Exempt exempt exempt).
National Pension Scheme (NPS)
NPS is not a mandatory contribution scheme, unlike EPF. An investor has to open an NPS account on their own, 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 biggest drawbacks of NPS is that after the withdrawal of the corpus once the subscribers reach the age of 60, it is compulsory to invest 40 per cent of the corpus in an annuity plan. Subscribers can withdraw the rest lump sum of 60 per cent from their corpus. Also, only after the 10th year of subscription, partial withdrawals can be made by the subscriber up to 25 per cent of his/her NPS savings.
Among tax benefits, NPS subscribers get full tax-exemption up to the limit of Rs 1.5 lakh under section 80C, along with tax-exemption of up to Rs 50,000 under Sec 80CCD (1B). Employees can also claim deduction under section 80CCD (2), on the employer’s contribution made towards employees’ NPS account, of up to 10 per cent of the basic salary plus DA.
What should you do?
As NPS and EPF both come with their own merits and demerits, experts suggest investors should opt for a combination of both the schemes to take advantage, especially for investors planning for retirement. Opting for a combination of both the schemes will benefit with not only the returns from NPS over EPF but also the zero risk of EPF and taxation benefits of Rs 2 lakhs, together.
Experts say not investing in the right instrument could mean losing out on the potential returns of investment. Also, choosing one investment tool for such an important part of life can be confusing, hence, it’s better to understand these investment instruments properly before taking a decision.
