For years, many higher-earners contributed amounts beyond the statutory requirement of 12 percent of the basic pay voluntarily, to their employees’ provident fund (EPF) accounts.
This is primarily because of the high tax-free interest that the instrument offers. However, two developments related to EPF have resulted in some high networth individuals (HNIs) rethinking their approach. That is, tax on interest earned on EPF contributions of over Rs 2.5 lakh a year, and 40-year-low interest rate of 8.1 percent.
EPF vs NPS: Which is the ideal retirement vehicle?
It is not surprising, therefore, that some employees who invest voluntarily in EPF (or VPF) are evaluating alternatives such as the other popular retirement instrument — the National Pension System (NPS), say financial advisors. “In terms of flexibility, tax benefits and, more importantly, returns, NPS is an attractive product now. 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, TaxSpanner.com, a tax consultancy firm.
However, there are others who feel that VPF and NPS cannot strictly be compared; both VPF and NPS deserve a place in your portfolio. “It should be one plus the other. Despite the tax on interest on EPF contribution over Rs 2.5 lakh, it remains attractive. Since the tax is only on the excess amount, the effective rate (post tax rate) will still be good,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.
Moreover, EPF continues to hold charm for risk-averse investors. “For a conservative investor, EPF continues to be attractive. NPS is a market-linked product, with returns subject to market fluctuations, but in case of EPF, the government will have to pay the interest at the declared rate, whatever be the vagaries of the market,” says Sadagopan.
Yet, if you are planning to move a part of your VPF investments to NPS this year, you need to understand the key features, particularly the restrictions on withdrawals from your NPS retirement corpus.
Also read: EPF or NPS: Which is better for retirement planning?
Here’s a guide to understanding the flexibilities and restrictions.
Can I make partial withdrawals from NPS before retirement?
Under NPS, you can open two accounts – Tier-I and Tier-II. The latter is a savings account that is to be opened voluntarily and there are no restrictions on withdrawal. It’s Tier-I (main, retirement account) withdrawal rules that you need to be aware of. You can make partial withdrawals from this account before retirement, subject to some restrictions.
You can withdraw 25 percent of your own contributions to the account after completing five years. Moreover, you can do so only for specific reasons – treatment of illness, disability, to fund education or marriage of children and finance property purchase. Interestingly, NPS also allows you to make this withdrawal if you plan to start a new venture. You are allowed to withdraw a maximum of three times during the entire period of investment.
Also read: How to generate Rs 50,000 per month pension from NPS?
What if I want to completely exit NPS prematurely?
This is also allowed, but again, subject to conditions. For one, you cannot make such withdrawals before completing ten years. If you have started investing in NPS after turning 60, this period is much shorter; just 3 years.
In case of premature exits, you can withdraw up to 20 percent of the corpus in the account as lump-sum. A whopping 80 percent of the corpus has to be mandatorily used to purchase annuity plan from empanelled life insurance companies. This annuity plan will be used to pay you pension post retirement, that is, after you turn 60. If the total corpus in the account is less than Rs 2.5 lakh, however, NPS will pay out the entire amount as lump-sum to you.
Can I withdraw my entire corpus at retirement?
The regular, final withdrawal can be made once you turn 60.
You can withdraw up to 60 percent of the corpus as lump-sum. However, you have to compulsorily convert the balance 40 percent into annuities. If your accumulated corpus is less than Rs 5 lakh, the entire lump-sum will be handed out to you.
The requirement to compulsorily buy an annuity plan is the key hurdle in the path of NPS gaining greater popularity. This is because annuities do not yield attractive returns (5-6 percent), and this pension income is also taxable as per the slab rate applicable to you. Sadagopan, however, differs. “Over time, NPS has become a flexible product. The long lock-in and mandatory annuitisation can be looked at positively too — this can actually help you save for your retirement years and get monthly pension post retirement,” he says.
In case of the NPS subscriber’s death, the nominees can withdraw the entire accumulated corpus, though they have the option of converting a part of it into annuities.
