EPF vs SIP: Which can create higher post-tax retirement corpus on Rs 1,44,000 investment a year for 30 years?
EPF vs SIP: Employees' Provident Fund (EPF) and Systematic Investment Plan (SIP) in a mutual fund are two different ways to create a retirement corpus. While EPF provides a fixed interest rate, SIP is market-linked, and the returns may vary. Both methods can be used for long-term retirement planning.
EPF vs SIP for retirement planning: There are many retirement investment options available to investors in India. Some are run by the government; the others are offered by private companies. Some are market-linked, while others are non-market-linked. While they can be important for the diversification of an individual's portfolio, they can create a sizeable retirement corpus if one is invested for a long term. Know how EPF and SIP work and which of them can create a higher tax-free corpus on a Rs 1,44,000-a-year investment for 30 years.
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(Disclaimer: This is not investment advice. Do your due diligence or consult an expert for financial planning.)
EPF's role in retirement planning
EPF is a retirement scheme run by Employees' Pension Fund Organisation (EPFO), where private sector employees can contribute on a monthly basis. The amount is deducted from their salary and credited to their EPF account. The employer also contributes an equal amount.
What is EPF interest rate?
EPF provides an interest rate of 8.25 per cent. The labour ministry reviews it once in 3 months. On its recommendation, the finance ministry gives the rate a go-ahead.
What are minimum and maximum EPF contributions?
An account holder needs to contribute at least Rs 1,800 monthly to their EPF account. The maximum EPF contribution limit is 12 per cent of the employee's basic pay and dearness allowance (DA).
How employer's contribution works
The employer can also contribute up to a maximum 12 per cent of the employee's basic salary and DA. But it is allocated to 2 schemes. While 3.67 per cent contribution from the employer goes to the employee's EPF account, 8.33 per cent is allocated to their Employees' Pension Scheme (EPS). Employees get this EPS amount in the form of a monthly pension at retirement.
What are EPF tax benefits?
EPF is one of a handful of government retirement schemes where deposits up to Rs 1.50 lakh a financial year, the interest earned, and the retirement corpus are tax-free. So, however large a corpus an employee gathers through EPF contributions, they don't have to pay tax on it.
How does SIP work?
SIP is a method to invest a fixed amount in a mutual fund scheme. The minimum SIP amount can be as little as Rs 100 for some mutual fund schemes. The investment period can be daily, weekly, monthly, quarterly, or yearly. When they make an SIP, the mutual fund house issues net asset value (NAV) units of the same amount.
Is SIP amount fixed?
The investor can increase or decrease the SIP amount based on their income-earning capacity. If an investor wants, they can also opt for a step up SIP, where they increase the SIP investment amount periodically.
Retirement corpus generated from Rs 1,44,000 contribution a year
The total EPF investment in 30 years will be Rs 43,20,000. The investment will create an estimated retirement corpus of Rs 1,84,89,110.47. It will be a tax-free maturity amount.
Retirement corpus created from Rs 1,44,000 investment a year through SIP
At Rs 1,44,000 investment a year, we are taking a Rs 12,000 as the monthly SIP investment amount. Since SIP returns are not fixed and depend on the share market situation, we are calculating the retirement corpus at 12 per cent, 10 per cent, and 8 per cent annualised returns, respectively.
Retirement corpus created from Rs 12,000 monthly SIP investment in 30 years (at 12% return)
The invested amount in 30 years will be Rs 43,20,000, estimated capital gains will be Rs 3,80,38,965, and the estimated corpus will be Rs 4,23,58,965.
Retirement corpus created from Rs 12,000 monthly SIP in 30 years (at 10% return)
At 10 per cent annualised growth, estimated capital gains will be Rs 2,30,31,904, and the estimated retirement corpus will be Rs 2,30,31,904.
Retirement corpus created from Rs 12,000 monthly SIP in 30 years (at 8 per cent return)
At 8 per cent annualised growth, estimated capital gains will be Rs 1,36,83,542, and the estimated corpus will be Rs 1,80,03,542. In all 3 SIP investment situations, an investor has to pay tax on the final corpus.
Let's calculate the estimated tax on Rs 4,23,58,965 corpus
Estimated long term capital gains on this corpus will be Rs 3,32,79,019, and estimated short-term capital gains will be Rs 47,59,946.
After exemption of Rs 1,25,000 on long-term capital gains, the estimated interest on the corpus will be Rs 51,11,867. Post-tax amount will be Rs 3,72,47,098.