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This question definitely arises in the mind of every employed and self-employed person regarding retirement, which path should be chosen for a secure future. When it comes to long-term investments i.e. 30 years, Employees’ Provident Fund (EPF) and National Pension System (NPS) emerge as the most popular options. If you start saving ₹10,000 every month from the age of 25 or 30, you will have a total of ₹36,00,000 (Rs 36 lakh) in your pocket in 30 years. But how much money you will get in your hands at the age of 60 after compounding and interest depends on the investment model of both the schemes. From a net return perspective, NPS has more than twice the potential for wealth creation due to equity exposure as compared to EPF, whereas EPF guarantees 100% safe returns without any risk.
The interest rate in the Employee Provident Fund (EPF) is decided annually by the government, which is currently stable around 8.25% per annum. This is a completely debt (fixed income) based investment. On the other hand, the National Pension System (NPS) gives the investor the option to invest in equities (E), corporate bonds (C) and government securities (G) under active or auto choice. Historically, NPS portfolios with 50% to 75% equity allocation have delivered average annual CAGR returns of 10% to 12% over the long term.
If you continue a regular investment of ₹10,000 every month for 30 years, the fund position in both the options will be as follows:
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Total Deposit (30 Years): ₹10,000 × 12 × 30 = ₹36,00,000 (Rs 36 lakh)
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EPF (8.25% fixed interest rate): Your total corpus after 30 years will be approximately ₹1.50 crore Will be made, in which the interest share will be around ₹ 1.14 crore.
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NPS Balanced Portfolio (10% Average Return): Your total fund after 30 years will be approximately ₹2.28 crore will reach Rs. 1,000 crore, which will result in net wealth growth of around ₹ 1.92 crore.
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NPS Aggressive Equity Portfolio (12% average return): Your total fund after 30 years will be approximately ₹3.53 crore It will take the form of a whopping Rs 3.17 crore, in which the share of returns alone will be Rs 3.17 crore.
Clearly, an additional return of 3% to 4% over a long tenure of 30 years takes the fund size from ₹1.50 crore to ₹3.53 crore directly on the basis of compounding.
Having a large fund size is one aspect, but it is important to understand how that money will end up in your hands upon retirement:
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100% lump sum withdrawal in EPF: The biggest advantage of EPF is that you can withdraw your entire fund (principal + interest) in lump sum on completion of 58 years of age or at the time of retirement. There is no pressure on you to buy any mandatory pension plan or annuity.
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60:40 formula in NPS: Maximum of total deposited fund in NPS at the age of 60 years Only 60% share is tax-free in lump sum Can be taken out. Remanent Annuity from a life insurance company with at least 40% share It is mandatory to buy. From this 40% share, you get monthly pension for life. For example, if your corpus turns out to be ₹2.5 crore, then ₹1.5 crore will get you in cash and ₹1 crore will go into the pension plan, giving you a regular pension of around ₹55,000 to ₹65,000 every month.
Both the schemes offer great benefits in terms of tax planning, but there are subtle differences in their provisions:
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EPF (EEE Model): EPF comes in the ‘exempt-exempt-exempt’ category. Exemption up to ₹1.5 lakh is available under Section 80C, the interest earned remains tax-free and the entire withdrawal on maturity is also tax-free (provided the annual employee contribution does not exceed ₹2.5 lakh).
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Additional rebate of ₹50,000 in NPS: In NPS, exemption under section 80CCD(1) is available in the general limit of ₹ 1.5 lakh under section 80C. Additional tax exemption of ₹50,000 under 80CCD(1B) There is a special provision, which is very beneficial for those in the old tax regime. Additionally, 60% of the lump sum withdrawal is completely tax-free, but 40% of the monthly pension from annuity gets added to your income and is taxed as per your tax slab.
If you are between 20 and 35 years of age and are in the early or middle stages of your career, you have a long time to weather the ups and downs of the market. In such NPS Will prove to be a much more powerful wealth creator for you as the magic of equity easily beats inflation in the long run.
On the other hand, if you are a completely conservative investor and want 100% guaranteed government protection by staying away from any stock market risk, then EPF Is your most trusted companion.
According to financial experts, the most sensible step is to continue the mandatory contribution deducted from your salary in EPF as a safety net, and invest the extra ₹5,000 to ₹10,000 saved every month in NPS. This will give you the balanced benefit of both lump sum capital security and a hefty pension at retirement.