NPS vs EPF: In cricket, if a batsman hits a shot and the ball barely crosses the boundary, or if he smashes the ball out of the ground, the end result of both shots is a six. But while people would call him a lucky person in the first case, the shot that landed outside the stadium would pose psychological pressure on his opponents’ minds. Similarly, when one plans their retirement and starts contributing to the Employees’ Provident Fund (EPF) or National Pension System (NPS), the end purpose of both is to create a sizeable corpus, but the amount accumulated in each case may vary significantly. As a result, the amount can be a crucial factor in determining one’s post-retirement quality of life. The more, the better.
The one who seriously ponders retirement planning searches for investment schemes that can give them a lump sum amount, a monthly pension, or both at retirement.
EPF and NPS may be two obvious choices as both schemes are time tested and have been opted for by crores of Indians for their retirement planning.
But, should one pick EPF or NPS, it may be a tough choice as they don’t know which of the two will give them more money in retirement.
While EPF is non-market-linked, NPS is market-linked.
One provides a guaranteed return; the other is based on market performance.
One is nearly risk-free; the other involves market risk.
Historic performance doesn’t ensure future performance, and market predictability comes to naught during a financial downturn.
While one can pick a retirement scheme based on personal goals, risk appetite, and withdrawal conditions, a long-term view of a retirement scheme’s performance can give us a good idea about it.
Value Research data from the last 15 years shows that the NPS Tier I accounts with equity exposure of different proportions have given better returns than EPF.
Before moving on to the calculation part, know the basics of the two schemes.
NPS
NPS is a retirement scheme where one can make lump sum or periodic contributions to their account.
A NPS subscriber can select a pension fund manager (PFM).
Along with that, one can opt for active choice and choose investment options, or auto option, where the proportion of funds is determined by a pre-defined portfolio.
A PFM invests the NPS subscriber’s money in equity and related instruments (Class E), corporate debt and related instruments (Class C), alternative investment funds, including instruments like CMBS, MBS, REITS, AIFs, Invlts, etc.
(Class A), and government bonds and related instruments (Class G).
The scheme provides compound growth.
Withdrawals up to 60 per cent at the time of retirement are tax free. The rest, 40 per cent that is invested in annuities is also tax-free.
However, income from annuities received in the form of a monthly pension is taxable.
NPS has Tier I and Tier II accounts.
For calculations, research firm Value Research has done a weighted average of Tier I E, C, and G returns.
With the weight of E taken at 75 per cent, 50 per cent, and 25 per cent as three scenarios, and the remaining portfolio invested equally between C and G.
EPF
EPF is also a retirement scheme where returns are based on fixed compound interest, the rate of which can be changed by the finance ministry.
At present, the EPF interest rate is 8.25 per cent.
An employee can contribute up to 12 per cent of their basic salary and dearness allowance (DA) to their EPF account.
An employer matches the amount and contributes it to the employee’s EPF and Employee Pension Scheme (EPS) accounts.
At retirement, one gets a lump sum and a monthly pension.
The scheme falls under the exempt-exempt-exempt (EEE) category, where the deposits up to Rs 1.50 lakh in a financial year, interest earned, and the maturity amount are tax-free.
NPS vs EPF
In the chart, we see that Rs 10,000 invested monthly in EPF and Tier I E category accounts for 15 years has yielded different results.
While, the EPF has given a total of Rs 35.10 lakh on an investment of Rs 18 lakh in 15 years, the worst-, average-, and best-performing Tier I E category fund with 25 per cent equity exposure has given Rs 39.30 lakh, Rs 40.3 lakh, and Rs 41.4 lakh, respectively.
On the other hand, the worst-, average-, and best-performing Tier I E category funds with 50 per cent equity exposure have given Rs 43.7 lakh, Rs 45.80 lakh, and Rs 47.0 lakh, respectively.
When it comes to the maximum 75 per cent equity exposure, the worst-, average-, and best-performing Tier I E category funds have given Rs 48.30 lakh, Rs 51.20 lakh, and Rs 52.4 lakh, respectively.
| Retirement corpus assuming monthly investments of Rs 10,000 in the last 15 years | |||||
| In Rs lakh | |||||
| PPF | EPF | TIER 1 NPS with 25 per cent equity exposure | TIER 1 NPS with 50 per cent equity exposure | TIER 1 NPS with 75 per cent equity exposure | |
| Worst performing | 33.8 | 35.1 | 39.3 | 43.7 | 48.3 |
| Average performing | 40.3 | 45.8 | 51.2 | ||
| Best performing | 41.4 | 47.0 | 52.4 | ||
| Note: Corpus as on April 30, 2024 considering monthly investments at the end of each month. | |||||
Chart Courtesy: Value Research
Thus, we see that Tier I E category mutual funds are the winners hands down.
Even the worst-performing NPS Tier I account with 25 per cent equity exposure has given Rs 4.20 more than EPF in 15 years.
But EPF has its own importance.
In a fixed income retirement instrument, money will grow irrespective of market situations.
Retirement options with equity exposure will always run the risk of performing poorly during an economic slump.
(Disclaimer: The calculations given here are just for informational purposes. Do your own due diligence or consult an expert before planning your retirement.)
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