Have you planned your retirement yet? Here’s how you can get started

Planning one’s retirement is a tricky task. There are several parameters that one should keep in mind before planning their retirement. To begin with, inflation hits your savings. Then there’s the traditional practice to invest in avenues like gold and real-estate.

However, EPF and NPS – two suitable retirement planning solutions have got your future covered. Here’s how these instruments will secure your golden years of life: 

1. Employee’s Provident Fund (EPF): The only forced saving instruments for the salaried individuals is their monthly contribution towards the Employee’s Provident Fund (EPF). An amount equal to 12% of your basic salary flows to the EPF account along with an equal contribution from your employer. Out of which, only 8.33% is allocated to pension fund under the Employee’s Pension Scheme (EPS). It ensures the increase in your contribution inline with the rise in your basic salary. Though this feature is very critical in building a handsome retirement corpus, it provides you with tax benefits on the contributions made under section 80C, interest earned and money received on superannuation.

Points that you should consider to make the most of EPF are as follows: 

a. Hold on to your account till retirement: You should not dip into EPF for your short-term needs. Recently, the government has permitted partial withdrawal from the account in the case of your ward’s marriage, higher education and making a down payment for a house, subject to conditions. 

You should hold the corpus till your retirement until there is a genuine crisis for the funds. The essence of EPF is its compounding feature. For example, an individual with a basic salary of Rs 15,000 and 30 years left for retirement can build a corpus of Rs 60.75 lakh at the age of 58, assuming a 5% annual rise in contribution.

If the funds are partially withdrawn, it takes away the magic of compounding accrued over a long period. 

b. Relatively higher returns than PPF: The returns offered by EPF for the FY 2019-20 is 8.65%, whereas the PPF is offering an interest of only 7.9% for the third quarter of FY 2019-20. 

c. Enhance your contribution through VPF: VPF is an extension of EPF and you can contribute beyond the threshold of 12% for the same tax benefits and returns. You should keep in mind that in case of a Voluntary Provident Fund (VPF), the money is locked till your retirement or until the time you leave your job. If you are close to your retirement, you can consider contributing to VPF. Do not expose your portfolio to equities to achieve a bigger corpus. However, younger investors can opt for a higher opting component through NPS or equity funds rather than enhancing their exposure to debt components. 

d. Transfer the existing account along with job change: You should transfer your existing EPF account balance to the new employer. Do not withdraw the accumulated balance or leave the amount untransferred from the EPF account. It could increase your tax liability as the interest keeps accruing until the retirement. The interest component will be added to your taxable income, even if the money is not withdrawn from the account.

Also Read: Early retirement: Is it the new millennial mantra

2. National Pension Scheme (NPS): NPS is a dedicated pension offering attractive tax benefits and more investment flexibility. It deploys up to 75% of the corpus in equities, giving more potential for speedy wealth creation over a long period.

Here’s why you should choose NPS for your retirement planning: 

a. Multiple tax benefits: An NPS subscriber can claim multiple tax benefits. First, the investments made under section 80CCD(1) is an allowable deduction capped under the overall limit of Rs 1.5 lakh of section 80C. NPS contribution from employer on behalf of the employee is deductible under section 80CCD(2) to the extent of 10% of basic salary. This deduction is over and above the limit of Rs 1.5 lakh under section 80C. Apart from these, you can invest a sum of up to Rs 50,000 and claim it under section 80CCD(1B). It means you can save an additional amount of Rs 15,600 of taxes provided you are in the 30% tax bracket.

b. Choose your investment mode: The NPS subscribers have an option to choose between two investing modes – active choice and auto choice. Under the active choice option, you can choose your own asset-mix, decide the contribution between equity, corporate bonds and government bonds. Whereas under the auto choice model, the asset mix changes automatically with the age of the subscriber. 

c. Switch the fund manager, if required: Investment experience of a subscriber depends on the capabilities of their fund manager, apart from the unpredictable occurrence of the market itself. NPS allows you to switch your fund manager two times in a year without attracting any tax incidence. You should switch only if the underperformance persists for three or more years. 

d. Apart from tax-savings: You should not invest your hard-earned money in NPS alone for its tax benefits. A 40% of your retirement corpus will go towards the compulsory annuity, leaving a less room for your pension income. Taking the current market rates in consideration, the annuity rates in the future will be much lower, which will imply a lower pension in the hands of subscribers. 

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in