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(Precious) Words of Wisdom : "Never spend your money before you have earned it." ~ Thomas Jefferson

Arun Jaitley's EPF vs NPS choice is no choice at all

Finance Minister Shri Arun Jaitley, in his Union Budget for 2015-16, has proposed two important amendments regarding the Employees Provident Fund (EPF) Scheme.

As per the same, employees covered under the EPF Scheme would be given two options, viz.
a) an employee would be given an option to invest either in EPF or the National Pension Scheme (NPS)
b) employees whose monthly income fall below a certain specified level, would have the choice to contribute to EPF or not. This will not affect or reduce their employer’s contribution. 

As per current regulations, companies have to make mandatory deductions from an employee's salary and deposit it (together with employer's contribution) in the Employees Provident Fund Scheme. Though companies can open NPS accounts too for their employees, contributions to the same have to be over and above the compulsory EPF deductions. (Of course, individuals can open their own independent NPS accounts too.)

However, this choice between EPF and NPS is a non-starter. There is simply no competition between the two.

I had earlier discussed the nine serious limitations in NPS. Hence, when it comes to retirement planning, EPF handsomely beats NPS.

National Pension Scheme, as I had pointed out, suffers from
- High Taxes
- Low Liquidity
- Limited Flexibility

Employees Provident Fund Scheme, on the other hand, offers
- Tax Free Returns
- Need-based Liquidity
- Higher Flexibility

As such, there is simply no reason whatsoever for anyone to opt for NPS (unless forced at a gunpoint).

There is only one aspect of NPS which EPF doesn't cover... and that is investment in equity.

But this drawback in EPF can easily be made good with equity mutual funds. In fact, long term returns from equity mutual funds are tax-free. Whereas the returns from equity-based NPS fund are taxable. 

Thus, given that an EPF + MF combo is undoubtedly a far better alternative to NPS, Shri Arun Jaitley's offer to give you a choice between the two is no choice at all.  

Even the 2nd proposal — to make contribution to EPF voluntary — is not a sound idea. There is no social security in India. Thus, mandatory EPF at least builds some corpus for one's old age. 

Given a choice, most people would prefer to take the money "now", rather than wait for it for "decades". This is more true for the people with modest incomes, who have many unmet needs and desires. Making EPF deduction voluntary for this class of people would seriously endanger their retirement.

I hope the Finance Minister has a re-look at both these proposals. Giving some form of tax relief to NPS is the need of the day.

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