Retirement Planning: Compound growth is offered by NPS. Tier I and Tier II accounts are available. Tax-free withdrawals are allowed up to 60% of the total amount at retirement. The remaining 40%, which is invested in annuities, is exempt from taxes as well. On the other hand, annuity income obtained as a monthly pension is subject to taxes.
NPS vs EPF How NPS Outperforms EPF in Long-Term
NPS vs. EPF: In cricket, a batsman’s shot results in a six if it smacks the ball just over the boundary or if it smacks it out of the ground. However, even though the first instance would have made him appear fortunate, the shot that landed outside His opponents would be under psychological pressure from the stadium. Similar to this, the goal of both the Employees’ Provident Fund (EPF) and the National Pension System (NPS) is to build a sizable corpus when a person plans their retirement and begins making contributions, but the total amount accumulated in each case may differ greatly. Because of this, the quantity may have a significant impact on an individual’s quality of life after retirement. The more, the better.
When someone takes retirement planning seriously, they look for investment plans that can provide them with either a monthly pension, a lump sum payment, or both when they retire.
Given their proven track records and widespread adoption by Indians, EPF and NPS stand out as the two most obvious options for retirement preparation.
It can be difficult to decide between EPF and NPS because one never knows which would provide them with more money in retirement.
NPS is tied to the market, whereas EPF is not.
While the other is dependent on market performance, the first offers a guaranteed return.
While the other entails market risk, the former is almost risk-free.
Past performance does not guarantee future performance, and with a downturn in the economy, market forecasting is meaningless.
A long-term perspective of a retirement scheme’s performance can offer us a decent understanding about it, even though one might choose a retirement scheme based on personal goals, risk appetite, and withdrawal restrictions.
Data from Value Research spanning the previous 15 years indicates that the NPS Tier I accounts have varying amounts of equity exposure have outperformed EPF in terms of returns.
Understand the foundations of the two schemes before proceeding to the calculating section.
NPS NPS is a retirement plan that allows account holders to make either recurring or lump sum contributions.
Pension fund manager (PFM) selection is available to NPS subscribers.
In addition, active choice and auto-choice investing options are available, in which the percentage of funds invested is decided by a pre-established portfolio.
The funds of NPS subscribers are invested by a PFM in corporate debt and associated securities (Class C), equities and related instruments (Class E), and alternative investment funds (AIFs, CMBS, MBS, REITS, AIFs, Invlts, etc.).
government bonds and associated securities (Class G), as well as (Class A).
Compound growth is offered under the plan.
Tax-free withdrawals are allowed up to 60% of the total amount at retirement. The remaining 40%, which is invested in annuities, is exempt from taxes as well.
On the other hand, annuity income obtained as a monthly pension is subject to taxes.
NPS offers accounts for Tier I and Tier II.
Value Research, a research firm, computed a weighted average of the Tier I E, C, and G returns.
With the remaining portfolio divided evenly between C and G, and the weight of E set at 75%, 50%, and 25% as three possible outcomes.
EPF
The Finance Ministry has the authority to modify the set compound interest rate that underpins the earnings of the Employee Provident Fund (EPF), another retirement plan.
The EPF interest rate is currently 8.25 percent.
Up to 12% of an employee’s base pay and dearness allowance (DA) may be deposited into their EPF account.
Employers contribute to their employees’ Employee Pension Scheme (EPS) and EPF accounts by matching employee contributions.
A lump sum payment and a monthly pension are received upon retirement.
The scheme is classified as exempt-exempt-exempt (EEE), meaning that interest accrued, the maturity amount, and contributions up to Rs 1.50 lakh in a financial year are all tax-free.
EPF vs. NPS
The graphic illustrates how investing Rs 10,000 per month for 15 years in Tier I E category accounts and EPF has produced varying returns.
While the EPF has returned a total of Rs 35.10 lakh on an investment of Rs 18 lakh over a 15-year period, the Tier I E category funds with 25% equity exposure that performed the worst, average, and best have returned Rs 39.30 lakh, Rs 40.3 lakh, and Rs 41.4 lakh, respectively.
However, with 50% equity exposure, the worst-performing, average-performing, and best-performing Tier I E category funds have contributed Rs 43.7 lakh, Rs 45.80 lakh, and Rs 47.0 lakh, respectively.
The worst-performing, average-performing, and best-performing Tier I E category funds have contributed Rs 48.30 lakh, Rs 51.20 lakh, and Rs 52.4 lakh, respectively, toward the maximum 75% equity exposure.
| Retirement corpus assuming monthly investments of Rs 10,000 in the last 15 years | |||||
| In Rs lakh | |||||
| PPF | EPF | TIER 1 NPS with 25 per cent equity exposure | TIER 1 NPS with 50 per cent equity exposure | TIER 1 NPS with 75 per cent equity exposure | |
| Worst performing | 33.8 | 35.1 | 39.3 | 43.7 | 48.3 |
| Average performing | 40.3 | 45.8 | 51.2 | ||
| Best performing | 41.4 | 47.0 | 52.4 | ||
| Note: Corpus as on April 30, 2024 considering monthly investments at the end of each month. | |||||
Value Research courtesy of the chart, NPS vs EPF How NPS Outperforms EPF in Long-Term
Consequently, it is evident that mutual funds in the Tier I E category are the clear winners.
In the past 15 years, even the worst-performing NPS Tier I account, which has a 25% equity exposure, has given out Rs 4.20 more than EPF.
EPF is significant on its own, though.
Money in a fixed income retirement plan will increase regardless of the state of the market.
Retirement plans that include equity exposure will always have a chance of underperforming in a downturn in the economy.
Account opning link:
- Groww Account- https://app.groww.in/v3cO/kyrp1zph
- Kotak neo Account https://kotaksecurities.ref-r.com/c/i/32531/109103906
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