Is NPS a better option than EPF?

The Employees Provident Fund account scheme has been popular over the years. Statistics show that most high-earners invest more than 12% of the basic pay requirements in the EPF scheme. The primary reason for investing in a larger corpus than usual is the financial instrument’s high tax-free interest. However, two new modifications in EPF have forced investors to consider other alternatives. These are:

1. The applicability of tax on interest earned for more than Rs 2.5 Lakh per year.
2. A low interest rate of 8.1% for 40 years.

Hence, many investors are looking for other options, and the National Pension Scheme (NPS) is becoming a popular investment instrument. “NPS is an attractive product now in terms of flexibility, tax benefits and, more importantly, returns. We have been advising our clients to rejig their salary structures to include NPS, if possible, and also invest in NPS instead of VPF,” says Sudhir Kaushik, Co-founder and CEO of TaxSpanner.com, a tax consultancy firm.

Things to know before investing in the NPS 

Under the umbrella of the NPS, you can open two different accounts – Tier 1 and Tier 2. The Tier 2 account can be opened voluntarily, and there’s no limit on the withdrawal. However, certain restrictions are in place when you withdraw from the Tier-1 account before retirement. Once you complete five years, you can take out up to 25% of the funds from the NPS. The reason for withdrawal must compel you to require a large corpus such as medical treatment, marriage, funding for education etc. 

If you want to exit the NPS prematurely, you can only do so after ten years. The period reduces to 3 years if you are 60 or above. In case of a premature exit, you can withdraw 20% of the total amount, with the rest 80% having to be mandatorily invested in empanelled life insurance organisations. 

You can withdraw the total amount from the NPS once you turn 60. If the corpus is greater than Rs 5 Lakh, 60% of that amount can be taken out as lumpsum with the remaining 40% mandatorily invested in annuities. If the corpus is less than Rs 5 Lakh, the entire amount will be given to you as lumpsum. 

Conclusion

The primary hurdle when investing in the NPS is the mandatory purchase of the annuity. The annuity does not provide high returns, and the interest is taxable depending on the tax slab you fall in. However, Suresh Sadagopan, Founder of Ladder7 Financial Advisories, says, “Over time, NPS has become a flexible product. The long lock-in and mandatory annuitisation can be looked at positively too — this can help you save for your retirement years and get monthly pension post-retirement.”

For any clarifications/feedback on the topic, please contact the writer at sourabh.dubey@clear.in