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Retirement Planning : EPF handsomely beats NPS

Employee Provident Fund (EPF) and National Pension System (NPS) are two schemes available for planning one's retirement...apart from the Pension Plans from insurance companies.

On many counts, however, EPF proves to be a better scheme than NPS (and also the traditional Pension Plans from insurance companies). As such, those having investible surplus for retirement purposes, would find it lot more flexible, convenient and profitable to invest in EPF vis-a-vis NPS. 

As you would be aware, 12% of the basic salary is only the mandatory minimum amount to be invested in EPF. The scheme allows you to increase your EPF contribution to up to 100% of your basic salary. (Of course, employer's contribution would be limited to 12% only). 

Here are some of key benefits of EPF vis-a-vis NPS.

1. In EPF you receive the 'entire' accumulated corpus on retirement. Whereas in NPS, you will get back only 60% of the corpus. With 40% corpus you have to compulsorily buy an Annuity. Thus, you lose access to a sizeable part of your own money. Who knows what the situation may be 20-30 years hence? Maybe you need lump-sum for your daughter's marriage; or you need to build a house; or you have settled abroad. This loss of access can prove to be a big drawback.

2. EPF allows premature part withdrawal for specific purposes such as medical, marriage, buying a house etc. In NPS you get no such flexibility. If you need money, you will have to foreclose the scheme. But then too you will get back only 20% amount. The balance 80% will get compulsorily invested in an Annuity.

3. The maturity proceeds of EPF are 'tax-free'. Whereas the 60% corpus returned to you in NPS is taxable. Further, even the pension (that you receive from the 40% amount invested in an annuity) is taxable. If you had the money in your hand, you could have possibly invested it in a better manner. For example, if someone were to retire today, he could be better off investing in debt MFs as compared to an annuity.

4. There are no expenses in EPF. Whereas NPS involves annual fund management charges apart from transactions costs.

5. Of course, NPS offers you an option to invest up to 50% amount in equities. And equities are ideal for such long term investment to create sizeable retirement corpus. This problem can be solved by investing part amount in EPF and balance in equity MFs. These too give tax-free returns and entire amount is returned to you on redemption.

While the experience till date has been that NPS has delivered better returns than EPF, this advantage is negated by the fact that on NPS money you have to pay tax. Therefore, under present rules, EPF+Equity MFs prove to a better bet to plan your retirement than NPS. 

Since the time I wrote this post, Govt. has amended the guidelines pertaining to 
(a) withdrawal at maturity or in the interim and 
(b) premature closure. 

Read Govt's grip on your NPS money loosens as exit rules are relaxed.

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