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Investment Dilemma: NPS Vs EPF

National Pension Scheme (NPS) is slowly getting more popular among employees. Even some big conglomerates are offering nps versus epftheir employee's option to apply for NPS apart from the usual Employee Provident Fund (EPF) scheme, which is generally a part of the salary structure. Now, here are some points which are making NPS a popular and more accepted option. Firstly, the scheme of NPS is for all individuals and not just restricted to a salaried class person. Secondly, this scheme is more feasible in terms of returns. The idea behind the scheme is to invest the corpus in equities, which is a high risk generating alternative compared to the fixed income option of interest in Provident funds.

Sameer Sethi’s age is 30 years and he is working for an FMCG company in Delhi. He is shifting his focus from a PF scheme in which he was till now investing towards the NPS scheme which his company is offering from current financial year. Talk to him and he will say that it will help him in building sound corpus at the time of his retirement. He said that he is investing in the India growth story considering that the portion of funds i.e. 50 percent of the corpus is invested in equity bureaus under NPS schemes.

Choices Available Under NPS:

There are generally two options that are given to employees by companies offering pension schemes. One option is to invest at a subscriber’s level and the other option is to invest on a company level. Under subscriber level, the employee has the option to choose his fund manager and even the asset allocation. In another option, the company will opt for the fund manager and even the asset is allocated based on company’s choice. In the latter case, companies generally opt for investment options of Central government employees. The company managed funds have also delivered better in terms of returns to employees that range from 9 to 12 percent, much more than the set 8.5 percent limit in case of EPF.

How the scheme works?

Not a rocket science by any sense of imagination. It is a simple procedure where the employee subscribes for the NPS scheme if available in his company. The amount that needs to be deducted under the scheme is also mentioned by the employee. Companies on the other hand can take benefit from Sec 80 CCE by claiming the contribution made by them under business expenditure in P&L account.

Difference of opinion:

Major difference of opinion emerges on the nature of the NPS and EPF scheme. NPS is generally an equity product, as 50 percent of the total funds are invested in equities and on the contrary, EPF is a debt scheme. If the products are different, so is the risk. Risk averse investors need stable returns and safety, for them it is better to continue with the primal provident fund scheme. For those who are early in their career and can take risks should always go for NPS as the returns generated can be far more in the long run compared to EPF. Some of you might be aware that EPF invests in government securities or debt products.

Withdrawal limit:

 In case of EPF, one can withdraw the complete amount before his retirement for specified reasons. However, in case of NPS, if the withdrawal limit is more than 20 percent of the total invested before the age of 60, it leads to foreclosure of account.

Demerits of Scheme:

Having scored on other points over EPF, NPS drags on the tax front. The most important criteria for a middle class salaried employee is to save tax, but NPS gets beaten on that portion by EPF. First and foremost the withdrawal from NPS is taxable under the Income Tax Act. The annuity which is earned after the retirement also attracts tax.

This product needs to be improved on that front, otherwise it lacks the appeal for retirees. Further, an Employee contribution of 10 percent of Basic and Dearness Allowance is deductible under Section 80CCD.

Costs involved in NPS are also a danger. These scheme charges fund management fees which increase the cost of investment which in EPF is NIL.

Looking at both the products from various angles, Employee Provident Fund scores over and above National Pension Scheme.  NPS scheme gets limited only to the returns front as it invests in Equities but under EPF one is getting the benefit of taxation, stable returns, withdrawal limits, security and no costs.

Conclusion:

 If you are looking for decent returns, liquidity and also to save tax, EPF should be your choice. If you are willing to take risk to get better returns through some exposure to equities, NPS is just for you.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com.

 

Calculators:

 

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Monthly Pension Calculator

 

Published May 09 2013

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