When planning for retirement, most people want to make sure they have a reliable source of income to support their lifestyle. While relying on a single source of retirement savings may feel risky, combining multiple schemes like the National Pension System (NPS) and the Employees' Provident Fund (EPF) can help create a strong financial safety net. Together, these two popular retirement plans can act like a Unified Pension Scheme, providing you with a steady stream of income during your golden years.
Let’s dive into how NPS and EPF can work together to give you peace of mind and financial stability after you retire.
What are NPS and EPF?
NPS (National Pension System): NPS is a voluntary retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows individuals to contribute regularly during their working years and provides a combination of market-linked growth and stable returns. Upon retirement, part of the corpus can be withdrawn as a lump sum, and the rest is used to buy an annuity, ensuring regular income.
EPF (Employees' Provident Fund): EPF is a government-backed retirement savings scheme for salaried employees. Both the employee and employer contribute to this fund, which earns a fixed rate of return. Upon retirement, the corpus can be withdrawn, and a portion can also be used to generate regular income through fixed instruments like annuities or Systematic Withdrawal Plans (SWP).
How NPS and EPF Work Together for Retirement Income
By leveraging both NPS and EPF, you can create a reliable income stream similar to a unified pension scheme. Here’s how they complement each other:
Regular Contributions:
EPF: Your employer and you contribute a part of your salary towards the EPF account, which grows steadily due to the fixed interest rate.
NPS: You can voluntarily contribute to NPS, which offers a mix of equity and debt investments, providing market-linked returns.
Diversification:
- EPF offers stability with fixed returns, ensuring you have a conservative investment component in your portfolio.
- NPS allows exposure to equities, potentially higher growth over the long term, balancing risk and reward in your retirement portfolio.
EPF: You can withdraw the entire EPF corpus at the time of retirement or part of it during your career for specific needs.
NPS: At retirement, you can withdraw up to 60% of the corpus tax-free, while the remaining 40% must be used to buy an annuity, which provides regular income.
Calculation: How NPS and EPF Can Ensure Regular Income
Let’s take a look at an example of how combining these two schemes can provide a pension-like income:
Assumption:
- Age of retirement: 60 years
- Monthly contribution to EPF: ₹10,000
- Monthly contribution to NPS: ₹5,000
- Investment period: 30 years
- EPF interest rate: 8%
- NPS returns: 10%
- EPF Calculation:
- If you contribute ₹10,000 monthly to EPF for 30 years, assuming an 8% return:
- Final EPF Corpus = ₹1.5 crore (approx.)
- With a monthly NPS contribution of ₹5,000 for 30 years and assuming 10% annual returns:
- Final NPS Corpus = ₹1 crore (approx.)
Upon retirement at 60:
- EPF Corpus: You can withdraw the entire ₹1.5 crore and invest it in safer instruments like annuities or SWPs to generate regular income.
- NPS Corpus: You can withdraw 60% tax-free, which is ₹60 lakhs, and the remaining ₹40 lakhs will be used to buy an annuity that will provide regular monthly income.
- The EPF lump sum can be used to buy a fixed-return instrument that generates monthly income.
- The NPS annuity will provide you with a monthly pension based on the annuity plan you choose (with varying interest rates).
- Assuming an average 6% annuity return, the combined monthly income from EPF and NPS can easily replace your pre-retirement earnings and ensure financial stability throughout retirement.
Why Combining NPS and EPF is Beneficial
Both NPS and EPF provide tax-saving benefits under Section 80C. NPS also offers additional tax benefits under Section 80CCD(1B). EPF offers stability through guaranteed returns, while NPS provides market-linked growth for long-term wealth creation. Both schemes allow you to decide how much to contribute, and you can adjust based on your retirement goals. Additionally, NPS’s mandatory annuity purchase guarantees a steady pension post-retirement, while EPF’s lump sum can be invested in other pension-generating instruments.
By combining NPS and EPF, you can create a well-rounded, unified pension-like income for your retirement. Make sure to assess your financial goals and consult a financial advisor to optimize your contributions for both EPF and NPS, ensuring you get the most out of these retirement schemes.
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