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NPS tax benefit vs EPF vs PPF: Example on how it plays out for your retirement corpus

There are many options available to accumulate retirement corpus, but NPS and EPF are compulsory for government and private sector employees respectively, while PPF is most popular voluntary scheme.

retirement corpus, pension, National Pension System, NPS, New Pension Scheme, Employees’ Provident Fund, EPF, Public Provident Fund, EPF, income tax, 80C benefit, 80CCD benefits, tax-free return, CAGRGenerally, the length of retired life of as person is equal to his/her working life.

Generally, the length of retired life of as person is equal to his/her working life. So, ensuring a decent and steady flow of income after retirement is as crucial as getting a good salary package during the working life.

There are many options available to accumulate retirement corpus, but NPS and EPF are compulsory for government and private sector employees respectively, while PPF is most popular voluntary scheme.

NPS

The National Pension System or NPS (earlier New Pension Scheme) was launched to replace the conventional pension system for government employees, who joined on or after January 1, 2004. Such government employees compulsorily contribute 10 per cent of their basic salary to NPS fund, while the government also make matching contribution. A proposal is there to increase the employees’ contribution as well as the government’s matching contribution to 14 per cent each.

From May 2009, NPS was made available for common public between 18 to 60 years of age.

There are two types of NPS accounts — Tier-I and Tier-II. While Tier-I account is for retirement purpose and matures when the contributor retires at the age of 60, there is no such restrictions or withdrawals in Tier-II accounts. However, in the recent changes in NPS rules, proposal has been made to extend 80C benefits to government employees on deposits made in Tier-II accounts from April, 2019, provided that the money is deposited for at least three years. Moreover, voluntary contributions to Tier-I accounts entails a contributor tax deductions u/s 80CCD up to Rs 50,000 in a financial year, which is over an above the Rs 1,50,000 investment limit u/s 80C.

Apart from choice of accounts, there are three investment choices are also available to corporate or individual contributors. The choices are – Asset Class E, in which investments are made predominantly in equity market instrument; Asset Class C, in which investments are made predominantly in fixed income instruments other than Government Securities and Asset Class G, in which investments are made predominantly in Government Securities.

The NPS rules make it compulsory for the investors to Tier I account to invest at least 40 per cent of the retirement corpus in a pension plan of any IRDAI governed insurance company, while the remaining 60 per cent may be commuted at the time of retirement or after attaining the age of 60 years. The entire commutation part, that is 60 per cent of the retirement corpus, is tax free.

The contributions made to NPS are manged by designated Pension Fund Managers (PFMs) and are invested in company stocks, government bonds and money market instruments. So, the value of retirement corpus would depend upon the returns that the investments generate over the investment period.

Following tables show the periodic compound annual growth rate (CAGR) generated by PFMs under various options. Birla Sun Life Pension Management Ltd (BSLPM) is not included in the tables as the PFM is yet to complete two years of operations.

Periodic CAGR

Assuming average CAGR of 10 per cent and average investment of Rs 1 lakh in the beginning of each year, the value of retirement corpus in 30 years of service would be Rs 1,80,94,342.

EPF

The Employees’ Provident Fund (EPF) is aimed at providing retirement benefits to the private sector employees, which is compulsory in organisations having 20 or more employees having monthly basic salary of Rs 15,000 (the figure is revised periodically) or less, and optional for employees earning more.

As the part of the scheme, 12 per cent of the basic salary (including basic wages, retaining allowance and dearness allowance (DA), including the cash value of any food concession) is deducted every month as PF contribution from the salary. While the employer makes a matching contribution of 12 per cent, the Central government also contributes 1.16 per cent of eligible basic salary.

Entire employee’s contribution is eligible tax benefits u/s 80C, even if it is more than 12 per cent of basic salary, while employer’s contribution up to 12 per cent of the basic salary or Rs 15,000 per month, whichever is less, is tax free.

The PF amount is tax free, if withdrawn after 5 continuous years of contribution.

The interest rates on EPF are decided by the EPFO and is currently fixed at 8.65 per cent per annum.

Assuming that the current interest rate will remain constant and average investment of Rs 1 lakh in the beginning of each year in PF, the value of retirement corpus in 30 years of service would be Rs 1,38,76,251.

PPF

Any earning individual may open a Public Provident Fund (PPF) account for self and/or his/her minor child and can make total contribution (taking together all the accounts) of Rs 1,50,000 in a financial year, which is revised by the government from time to time. The minimum contribution in a financial year is Rs 500. Maximum number of contributions allowed in a financial year is 12.

The tenure of PPF account in 15 years, which may be extended in a block of 5 years any number of times. Partial withdrawals are allowed after 7 years from opening an account.

The contributions made in PPF account are eligible for 80C benefits and the interest earned and maturity amount are also tax free.

The government fixes the interest rate on PPF, which is currently 8 per cent per annum.

Assuming that the current interest rate will remain constant and average investment of Rs 1 lakh in the beginning of each year, the value of retirement corpus in 30 years of service would be Rs 1,22,34,587.

 

Contents from https://www.financialexpress.com/money/nps-tax-benefit-vs-epf-vs-ppf-example-on-how-it-plays-out-for-your-retirement-corpus/1508348/

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