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What is good for you: EPF, NPS or both?

LiveMint logoLiveMint 04-09-2017 Deepti Bhaskaran

Mukul G. Asher, professorial fellow, National University of Singapore

From an individual investor’s perspective, NPS is preferable to EPF. 

First, NPS members have greater choice over allocation of savings. In contrast, it is the EPFO board, which has been slow in adopting modern investment management practices, that decides the asset allocation for all members—regardless of their risk-return preferences. Second, mandatory members of the NPS have got average annual nominal return of 11% over the last 5 years, compared to EPF’s return of about 8.6%. Third, the NPS architecture—and administrative and compliance structure—is more investor friendly and adopts technologies faster. This lowers the overall costs. Even EPF has reduced the administrative costs from 0.85% to 0.65% of total wages; and has accelerated adoption of technology. Such contestability between the two is positive for savers; strengthening the case for letting members to choose between the two. Fourth, flexibility at the time of retirement is much greater in NPS, as you can delay withdrawal of lump sum up to 10 years and also postpone the decision to annuitize a part of the maturity corpus by 3 years. This allows more time for your investments to compound. In EPF, you need to withdraw the lump sum on retirement and decide where to invest to manage your retirement money. The mandatory annuity component in NPS provides better protection against longevity risk. 

Gajendra Kothari, MD and CEO, Ética Wealth Management Pvt. Ltd

NPS is a voluntary, defined-contribution-based retirement savings scheme for those employed in the organised and unorganized sectors. (For now) EPF is for the organised sector only. EPF is predominantly a debt instrument as most of its investments go into debt. The equity allocation in case of EPF has been increased to 10% recently, with a cap of 15%. NPS has three plans: equity, government bond and corporate debt. With the equity option, equity allocation can go up to 50%. It also has an auto life cycle option where asset allocation between equity and debt keeps changing automatically as the person ages and equity can get to 75%.

The Trustees of EPFO declare the interest rate for the year, which is currently 8.65%, while NPS is market-linked. Presently, on taxation front, NPS is not as attractive as EPF but I think over time it would get equal or better treatment.... Market-related volatility and returns are not suitable for everyone and the more conservative investors should continue with EPF. Subscribers under 40 should use NPS as the main vehicle for wealth creation and retirement planning. One can also have both, so the fixed component from salary can be deducted (12% of basic) towards EPF and additional Rs50,000 can go to NPF to get extra tax benefits under Section 80 CCD (1B). I prefer NPS, as even a 2% higher return over a period of time can do wonders for retirement planning.

Kulin Patel, head of retirement, South Asia, Willis Towers Watson

If one’s purpose is to have a regular base income upon retirement, NPS does that best; given that it has a compulsory element of annuity. EPF gives a lump sum, and needs more planning and discipline on how that money will be used. EPF, however, enables flexibility in using the money.

In terms of access, EPF has more access points in the accumulation phase as the funds can be withdrawn under certain circumstances and also for certain defined life events.

Comparatively, NPS has limited ability to do that. However, if one wants flexibility, then Tier II NPS accounts are an option.

In terms of returns, NPS has more investment choices and most importantly an ability to have good equity exposure. This is better for long-term protection against inflation and NPS has done better in recent times than EPF. However, EPF has principal amount guarantee and (though) future declared interest rates are subject to change. The investors’ risk appetite and time horizon influence what they prefer. EPF has an advantage over NPS on taxation as it is EEE and NPS is EET (taxation is partial). However, NPS enjoys an additional Rs50,000 allowance on individual contributions. EPF employer contributions are also typically 12% of provident fund wages (usually basic + dearness allowance), and NPS employer contributions’ tax deduction allowance is 10% of basic + dearness allowance. This means EPF wins there.

Chitra Jayasimha, senior actuary and practice leader, retirement and Investment, Aon Hewitt 

Despite being voluntary for employees who earn more than Rs15,000, in practice all employees are covered under EPF irrespective of salary limit. An employee contributes 12% of salary and the employer also contributes 12% of applicable salary. Employer’s contribution is completely tax exempt, whereas employee’s contribution is tax exempt up to Rs1.5 lakh. 

NPS is voluntary. Here, the employer can contribute up to 10% of applicable salary without any limit, which is tax exempt, and the employee can contribute up to Rs2 lakh a year—which is tax exempt.

EPFO is paying interest at the rate 8.65% for FY17, whereas NPS has given an average return of around 10%, across portfolio since 2011. In terms of withdrawal, at retirement an employee can withdraw 100% of the EPF corpus tax free. In case of NPS she can withdraw 40% of it tax -free. EPF can be taken as a guaranteed return plan, and NPS is market linked. NPS returns can be volatile and if the market is down at the time of retirement, employees may have to wait until the fund value appreciates, thereby making it riskier than EPF.

On the face of it, EPF fund is more efficient. However, given that by itself it is not sufficient to meet the needs of the employee post retirement, it is best that an employee contributes to both EPF and NPS to have a sizeable retirement corpus.

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