Retirement Planning: Should you contribute to EPF, NPS, or both? Know what expert suggests about your future plan

EPF vs NPS: Employees' Provident Fund and National Pension System are two retirement schemes that many Indians choose every year for their retirement planning. While the EPF scheme offers a fixed compound return of 8.25 per cent annually, the NPS is a market-linked scheme, where the returns may vary based on equity proportion or fund manager selection. The interest earned and the maturity amount in EPF are tax-free, while there is no tax on NPS corpus if one is withdrawing up to a 60 per cent lump sum at the time of retirement. Deposits up to Rs 1.50 lakh in EPF and NPS in a financial year are tax-exempt under Section 80C of the Income Tax Act. A Tier-I account in a NPS offers a further tax exemption of Rs 50,000 in a financial year.

Historical records show that NPS schemes have given better returns than EPF in the last 15 years.

But when a youngster starts a job and thinks of selecting one scheme, they often find themselves confused about the selection.

Is EPF better than NPS, or will the latter help build a larger corpus than the former?

This is a dilemma one often finds themselves in.

On some occasions, the employer makes it mandatory to contribute to EPF.

The employee in such cases think whether they should stick to EPF or should also contribute to NPS simultaneously. 

Ranbheer Singh Dhariwal, who is Chief Executive Officer of Max Life Pension Fund Management Limited, which also runs a prominent NPS fund, tries to remove the dilemma of people uncertain about contributing to EPF, NPS, or either of the two.

Dhariwal advises one to utilise the full EPF contribution limit of 12 per cent and deposit in NPS as well as to get tax benefits.

"If the employer mandates EPF contributions, as this is mostly a statutory requirement, one may contribute the mandatory 12 per cent of their basic salary plus DA to EPF. This provides you with a strong foundation for retirement savings. In addition to EPF, you can voluntarily contribute to NPS."

Divulging the strategy for EPF and NPS contributions, Dhariwal suggests allocating additional savings to NPS. "You can decide on an additional amount to contribute monthly. This amount can vary based on your financial situation and goals," he says.

Dhariwal says that one can use NPS and EPF contributions to save tax. "Your contributions to both EPF and NPS offer tax benefits under different sections of the Income Tax Act. By contributing to NPS voluntarily, you can maximise your tax savings and build a diversified retirement portfolio."

Dhariwal says that if one has the flexibility to contribute additional funds beyond the mandatory EPF contribution, they should do it.

"I would suggest you consider allocating these to NPS to benefit from tax advantages and broader investment options. Given you have age on your side, you may consider a higher allocation to equity (e.g., 75 per cent) in your NPS contributions to capitalise on long-term growth potential."