Which is the better retirement savings option between NPS and EPF? Learn about their benefits, investment methods, and tax benefits to help you make the right choice.

NPS invests in market-linked assets, while EPF is a product with guaranteed returns. The National Pension System (NPS) and the Employees' Provident Fund (EPF) are two popular retirement savings options in India. They differ in their working method; NPS invests in market-linked assets, while EPF is a government-backed option with guaranteed returns. Investing in NPS is entirely at your discretion, while EPF is primarily designed for salaried employees.

How does NPS work?

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS offers greater investment flexibility and operates through two accounts. Tier-I account (primary retirement account under NPS) Purpose: Designed specifically for long-term retirement savings. Tier-II account (optional savings account)

Purpose: It serves as a voluntary and liquid investment facility. When you contribute to NPS, your money is pooled together and managed by professional fund managers. You also have the flexibility to choose where to invest the funds, such as in equities, bonds, debt instruments, etc. This offers the potential to generate returns of around 10% or more on your funds. Depending on the size of your corpus, private sector employees can withdraw up to 80% of your corpus in one lump sum. 60% of your total corpus can be withdrawn in one lump sum and tax-free. The remaining amount should be used to purchase an annuity to provide regular income during retirement.

Example 1: If your corpus is Rs 8 lakh or less, you can withdraw the entire amount in one lump sum; there is no requirement to purchase an annuity. 60% of this amount is tax-free, while the remaining amount is taxed at the slab rate.

Example 2: If your corpus exceeds ₹12 lakh, you can withdraw up to 80% of your corpus in one lump sum. 60% of the total corpus is tax-free. The remaining amount is used to purchase an annuity. This rule applies to private employees, while government employees are required to use 40% of their corpus to purchase an annuity. The annuity pension is also taxed at the slab rate. How EPF works: For salaried employees, the entire EPF corpus is generally tax-free after 5 years of continuous service. Upon retirement (typically at age 58), you can withdraw your entire corpus, which includes both your and your employer's contributions. Currently, EPF offers a return of 8.25%, and the government reviews it periodically.

PC:Prabhat Khabar