The Employees Provident Fund Organisation (EPFO) is currently offering an interest rate of 8.65 per cent for the financial year 2018-2019 (to be notified soon) on Employees Provident Fund (EPF), up from 8.55 per cent for the year 2017-2018. Currently, where all interest rates are falling, EPF with such tax-free guaranteed return is one attractive option among investors, especially the salaried class who contributes to EPF on a monthly basis for their retirement. However, is EPF the best saving option for your retirement? Experts suggest investors might be losing out on the potential return that equities promise over the long term, as EPFO invests predominantly in debt instruments.
National Pension System (NPS) is also considered to be one of the best investment tools for retirement. Earlier, allocation to equities under the active choice option in NPS was capped at 50 per cent, but now under both auto-choice and active-choice option, NPS offers 75 per cent equity allocation. Ever since its rollout in 2008-09, PFRDA (Pension Fund Regulatory and Development Authority) has undertaken various measures to make NPS more subscriber-friendly. Generally, NPS allows investors to have higher exposure to equities, which can fetch higher returns, as compared to EPF.
If you are also thinking about investing for your retirement, find out how EPF fares against NPS?
Towards EPF, both the employee and the employer contributes 12 per cent of the employee’s basic wages. Towards employee pension scheme (EPS) 8.33 per cent (up to Rs 1,250) goes from the employer’s contribution. Investment in EPF can be made only through the employer. Even though it is not mandatory to contribute for EPF for those earning a basic salary above Rs 15,000 per month, however, most of the salaried people contribute towards it.
NPS, on the other hand, is a voluntary contribution scheme, which limited to non-government employees. Under NPS, the employee contributes as a mandatory monthly contribution of 10 per cent of their salary and dearness allowance, and a matching contribution can also be made by the employer. Investors can also open an NPS account on their own.
Returns from NPS are market-linked and hence, nothing is guaranteed here. Hence, if equity markets are not doing well, NPS might face the loss of capital over the short-term. However, over the long-term, there are chances of NPS delivering good returns.
EPF returns are guaranteed and are backed by the government. Hence, there is almost no chance of capital loss.
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EPF has given an average interest of 8.68 per cent over the past 5 years, and currently is offering an interest rate of 8.65 per cent for the financial year 2019-2020 (to be notified soon). The Central Board of trustees is the decision-making body of EPFO. Depending on the earnings, they fix the interest rates to be offered on EPF for the year, which then goes to the Finance Ministry for approval.
In the case of NPS, depending on the fund you choose and performance of equity and debt markets, interest in NPS is calculated as it is a market-linked product. Investing in NPS gives you the option to spread your investments across 4 asset classes: A (alternate assets), C (corporate debt), G (government securities), and E (equities). For deciding their allocation across these classes, you can choose from either auto or active choice. If you choose the active choice, you have to decide how much allocation you need to be put in different asset classes. The allocation remains constant, until you as the investor decides to change it.
NPS has also recently got the EEE tax status. Hence, investors now investing in NPS, up to Rs 1.5 lakh under section 80C and Rs 50,000 under Sec 80CCD (1B) also enjoy full tax-exempt. As an employee, you can also claim tax deduction up to 10 per cent of the basic salary plus dearness allowances, on the employer’s contribution.
EPF falls under the EEE category (exempt, exempt and exempt) which makes it tax-free from the accrued interest and the accumulation on withdrawal. This is for investments made up to Rs 1.50 lakh under Section 80C.
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Source: Financial Express