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National Pension System (NPS) is the most recent entrant to the retirement planning schemes that are available in the country. It is sponsored by the Pension Fund Regulatory and Development Authority (PFRDA).

When first launched, the scheme was proposed as an Exempt-Exempt-Taxable plan. This means that the amount that would be withdrawn at the time of maturity was liable to taxation at the rates prevalent at the time. However, in Budget 2016, Finance Minister has proposed to give tax exemption on the 40% of the total amount payable at the time of closure or opting out of the NPS. This has made NPS, a very good retirement planning tool.

Applying for NPS is a quick and simple process. Individuals can open a tier I account with any of the designated Point of Presence (POP). On successfully opening the account, subscribers receive a Permanent Retirement Account Number (PRAN), which is unique to every account holder. This PRAN is portable, which means that your NPS account is not affected by relocation or change of employer.

The contributions made to the NPS account are eligible for deduction up to an amount of INR 50,000 per annum, under section 80 CCD(1B) of the Income Tax Act. This additional tax deduction is over and above the existing limit of INR 1.5 lakhs under section 80C of the Income Tax Act. The additional benefit was made available in last year’s budget.

The contributions are invested in different asset classes, which include government bonds, corporate debentures, and shares. However, a maximum of 50% can only be invested in equities and the remainder is distributed among other classes. The returns depend on market conditions, which make it riskier if you choose equities investments.

Subscribers could withdraw up to 60% of the accumulated corpus on reaching 60 years of age. The balance is reinvested in pension-related schemes offered by different insurance providers. The new proposal in the 2016 budget, tax structure has changed, which will increase the NPS tax benefits.  Finance minister has proposed to give tax exemption on the 40% of the total amount payable at the time of closure or opting out of the NPS.

The EPF is compulsory for employees who earn less than INR 15,000 per month and optional for others. Employees can make a maximum contribution of 12% of their salaries with the same amount being contributed by the employer. The current returns on EPF are 8.8% per year. A part of this amount can be withdrawn after meeting certain conditions.

Also, considering performance of last 5 years, NPS scheme of all 7 AMC on an average have given 9.15% annual return. NPS is an evolving product, recently the government has allowed pension funds companies to invest in the Futures & Options (F&O) segment. Earlier, pension fund companies were only allowed to invest in Nifty 50 companies as their weightage in the index. Now, the pension fund managers can actively invest in the companies which can give a better return than past.

This makes NPS more lucrative for investments. So if you have goals for 5 to 20 year perspective it does not make sense to invest in EPF.  You should rather go for mutual fund investment depending on your risk profile. For retirement needs NPS is likely to have an edge over EPF.

Note:Should you invest in NPS or EPF is a sponsored post.

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