EPF vs SIP: Which option may help you reach your Rs. 1.50 crore retirement corpus faster?

EPF vs SIP: Employees' Provident Fund (EPF) is a retirement scheme that provides a lump sum amount and a monthly pension post retirement. A systematic investment plan (SIP), on the other hand, is an investment method for mutual funds where one invests a prefixed amount every investment cycle. People with different financial goals invest in EPF and SIP. Many modern-age investors invest in both investment instruments. Know about both types of investments in detail and which of the options may help you reach a faster  Rs 1.50 crore retirement corpus. 

What is EPF?

EPF is a retirement investment scheme run by Employees' Provident Fund of India (EPFO).

Every month, an employee contributes to their EPF account.

The maximum amount they can contribute every month is 12 per cent of their basic salary and dearness allowance (DA).

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The employer also has to contribute an equal amount to the employee's EPF account.

The minimum amount that an employer needs to contribute is Rs 1,800, while the maximum is 12 per cent of the employee's basic salary and DA.

Out of 12 per cent, 8.33 per cent goes to the EPF, while the rest, 3.67 per cent, goes to Employees' Pension Fund (EPS), which provides a monthly pension to them post retirement.  

EPFO provides an 8.25 per cent annual compound interest rate to the employee.

The employee can also breach the limit of a 12 per cent contribution.

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But then, the extra amount will be known as the Voluntary Provident Fund (VPF).

The advantage of investing in EPF is that one gets tax relaxation of up to Rs 1.50 lakh in a financial year under Section 80C of the Income Tax Act, 1961.

The interest earned on the deposit and the maturity amount are also tax-free.

EPF falls under the exempt-exempt-exempt (EEE) category.

In VPF, you get that tax exemption only up to 12 per cent contribution of the basic salary and DA. Returns on above indicate that contributions are taxable. 

Since the scheme provides huge tax benefits, a lot of experts recommend individuals invest up to the maximum limit of 12 per cent. 

What is SIP?

One can invest in a mutual fund through a daily, monthly, quarterly, or yearly SIP.

They invest a prefixed amount every investment cycle.

However, the SIP amount can also be increased every year.

Such a SIP is known as a top-up SIP. SIP provides rupee cost averaging to investors, where the rate of net asset value (NAV) changes as the market rises and falls.

When the market is high, one purchases fewer SIPs, but the value of their investment increases.

When the market falls, one buys more NAVs, but the value of their investment decreases.

The second advantage is that SIP investment provides compound growth, where the value of one's investment may grow faster as time passes.

Investors who don't have a large amount to invest in one go and want to invest in small amounts every investment cycle prefer SIPs to lump sum investments. 

EPS vs SIP: How to reach Rs 1.50 crore corpus faster

Before we draw a comparison between the two investment options, we need to keep in mind that EPF is a guaranteed return scheme where one gets returns in the form of interest, while SIP is a market-linked programme where one may get much higher returns than EPF but where investments can turn negative if the market falls.

Since we don't know how much return we may get in a SIP, we will take a standard-sized return of 12 per cent.

In EPF, if you start contributing at 25 years of age till your retirement age of 60 years, you will get 35 years of investment.

If you get 8.25 per cent annual interest and want to reach the Rs 1.50 crore corpus target by 60, your monthly investment should be Rs 6,350.

After 35 years, your maturity amount will be Rs 1,50,29,133.18.

In SIP, if you start investing Rs 6,350 monthly at the age of 25 and get a 12 per cent return on your investment, you can achieve the Rs 1.50 crore retirement corpus target in just 27 years.

In 27 years, your invested amount will be Rs 20,57,400, long-term capital gains will be Rs 1,34,15,875, while the expected amount will be Rs 1,54,73,275.