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 EPS vs NPS: Which is Best For Post-Retirement?

Post-retirement security is one of the most significant financial concerns individuals face. In India, the two primary schemes offering post-retirement benefits are the Employees’ Pension Scheme (EPS) and the National Pension System (NPS). Both schemes serve the crucial purpose of providing financial stability during the retirement years, but they differ significantly in design, benefits, and returns. This article compares EPS vs NPS to determine which offers better post-retirement security.

 Employees’ Pension Scheme (EPS)

EPS, managed by the Employees’ Provident Fund Organisation (EPFO), is a social security scheme catering to the employees of companies registered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The scheme is funded by mandatory contributions from both the employer and employee.

 Contributions to EPS

– Employee’s Contribution: 12% of the basic salary + Dearness Allowance (DA) goes to the EPF account.

– Employer’s Contribution: 8.33% of this amount is diverted to EPS, subject to a cap of INR 15,000 per month.

 Benefits of EPS

1. Pension: The pension amount is calculated based on the average salary of the last 60 months and the total number of years in service. The formula used is:

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Pension Amount = (Pensionable Salary  Pensionable Service) / 70

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2. Family Pension: In case of the member’s demise, the family receives a pension.

3. Withdrawal Benefit: Employees can withdraw a lump sum amount before completing 10 years of service, opting to secure benefits from the provident fund alone.

 National Pension System (NPS)

NPS, introduced by the Government of India in 2004, is a market-linked, defined-contribution retirement plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

 Contributions to NPS

– Tier I Account: Mandatory, with a minimum annual contribution of INR 1,000.

– Tier II Account: Optional, with flexible investment options.

 NPS Current Interest Rate

The NPS is market-linked and does not offer a fixed interest rate. The returns vary based on the asset allocation in Equity, Corporate Bonds, and Government Securities. Historically, the nps current interest rate range between 8% to 10%.

 Benefits of NPS

1. Flexibility: Individuals can choose their investment mix and pension fund managers to suit their risk appetite.

2. Tax Benefits: Contributions to NPS offer tax deductions under Section 80CCD(1B) and 80CCD(2).

3. Annuity: At the age of 60, up to 60% of the corpus can be withdrawn tax-free, and the remaining must be used to purchase an annuity providing a regular pension.

 Comparing EPS vs NPS

 Risk and Returns

EPS: The pension amount is predetermined, offering no risk of market volatility but limiting the potential for higher returns. The formula-based calculation ensures a predictable income after retirement.

NPS: Market-linked returns pose higher risks but also provide opportunities for enhanced growth. The annualized returns often outpace traditional schemes due to diversified and equity-linked investments.

 Flexibility and Control

EPS: Lack of flexibility as it follows a standard contribution pattern with fixed rules for pension amount calculation.

NPS: Extensive flexibility allowing individuals to choose investment patterns, switch fund managers, and determine the level of risk they are comfortable with.

 Tax Benefits

EPS: The pension received is taxable under the head ‘Income from Salaries’. No explicit tax benefits during the contribution phase.

NPS: Contributions are eligible for substantial tax deductions, and 60% of the maturity corpus is exempt from tax.

 Withdrawal and Early Exit Options

EPS: Withdrawals are restricted and mostly beneficial post-retirement. Early withdrawal entails moving funds to the provident fund.

NPS: Permits partial withdrawals under specific conditions like higher education, purchasing a house, or medical treatment. The flexibility makes it suitable for varied life goals.

 Illustrative Example

Assume an employee with a basic salary of INR 50,000 contributing to EPS via EPF:

1. EPS Pension Calculation:

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Pensionable Salary = 15,000 (since capped)

Pensionable Service = 30 years

Pension Amount = (15,000  30) / 70 = INR 6,429 per month

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2. NPS Returns:

Assuming a 10% annual return over 30 years with a monthly contribution of INR 5,000, the corpus would be approximately INR 1.14 crore. Post-tax-free withdrawal, the annuity purchase using remaining corpus offers substantial monthly pension.

 Summary

The choice between EPS vs NPS depends significantly on individual preferences, risk appetite, and long-term financial goals. EPS offers a risk-free, fixed pension amount through predictable structure, whereas NPS provides higher growth potential through market-linked returns and greater flexibility. The decision on which scheme provides better post-retirement security varies among individuals, making personal financial planning crucial.

 Conclusion

Ultimately, both EPS and NPS present viable routes to post-retirement security. EPS shines for those seeking a stable, predictable pension, while NPS stands out for investors favoring growth opportunities and control over investments. This analysis underscores the importance of aligning retirement planning with personal financial goals and the necessity of thorough due diligence.


Disclaimer: This article provides the information for informational purposes only and it is not for financial advice. Investors must evaluate all variables and details before making decisions in the Indian financial market.

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