If you’re a salaried employee, how would you like to switch from your staid old EPF (Employees Provident Fund) to the market-linked NPS (National Pension System)?
Though the government has mooted it, there are still legal hurdles to cross before this option becomes a reality. But if given the choice to jump ship from EPF to NPS, should you do it? Here are the pros and cons.
Return and risk
If your retirement goal is to accumulate maximum wealth, never mind the risks. NPS is more likely to deliver it than EPF. This is because while EPF is restricted by mandate to stick to safe bonds for the major portion of its portfolio (equities are capped at 15 per cent), the NPS allows you to park 50 per cent in equities. Over the long term, equities can deliver far better returns than safe bonds.
In the last five years, equity plans under NPS have delivered a 13-14 per cent annual return; the government bond plans an 8-10 per cent return and corporate debt 11-11.5 per cent. So an investor who opted for 50-25-25 mix between the three assets would have earned 11.25 to 12.4 per cent annually. The EPFO, in this period, has delivered 8.25-8.8 per cent.
However, the high returns on NPS are a function of market conditions. Three years ago, the returns were less than impressive. The EPFO, in contrast, ‘declares’ its yearly interest based on the difference between its income and expenses. Enormous public pressure has so far ensured that it hasn’t trimmed its rates, even when market rates dip sharply.
Early exit
The EPFO also allows you to take an advance from your account during your service to deal with specific emergency needs. There’s a cap on the amount you can withdraw for each purpose.
The NPS ties your hands by mandating that 80 per cent of your corpus, in case of early retirement, has to be invested in an annuity plan. Partial withdrawals of up to 25 per cent of your contribution are allowed before 60. To withdraw, you must have completed 10 years with NPS and prove end-use.
Withdrawals are capped at three times, with a gap of five years between each.
While EPF is quite inflexible during your investment years, it imposes no conditions on your final retirement proceeds. You can withdraw your investment and accumulations from the scheme at retirement and do with them as you please.
NPS is restrictive and requires you to compulsorily use 40 per cent of your final corpus after retirement to buy an immediate annuity plan from empanelled insurers. Immediate annuity plans guarantee a fixed income for the rest of your life, but lock you into measly, taxable returns.
Taxation
The EPF is among the rare investment vehicles still on an EEE regime — your investment, annual returns and the final withdrawal are all tax-free.
But the NPS is on an EET regime. Your annual contributions earn tax breaks up to ₹2 lakh a year. The returns aren’t taxed each year.
But at retirement, just 40 per cent of your accumulated kitty is exempt from tax, 20 per cent is clubbed with your income and taxed at your prevailing slab. The remaining 40 per cent deployed in annuities becomes taxable when you receive it as regular income.
Overall, as things stand today, it makes a lot of sense to stick with the EPF and not make the switch.
The only aspect on which EPF really loses out to the NPS is its inability to deliver equity-linked returns.
But then, every retirement portfolio must have both a safe debt component and a risky component.
With its above-market interest rates and tax-free status, the EPF is the best parking ground for the safe portion of your retirement savings.
For the risky portion of your portfolio, consider balanced mutual funds, pure equity funds or the NPS, whichever takes your fancy.
