EPF vs NPS Retirement Fund Calculations: Which can create larger corpus on Rs 1,20,000/year step up investment for 35 years?

EPF vs NPS Retirement Fund Calculations: After the new tax regime was implemented this April, a taxpayer's contribution to the National Pension System (NPS) came into the limelight. It was because the new tax regime offers tax benefits on employer contributions to an employee's NPS account. It doesn't provide the same benefits to Employees' Provident Fund (EPF) account holders. The old tax regime provides tax benefits on EPF contributions up to Rs 1.50 lakh in a financial year under Section 80C of the Income Tax Act, 1961. But if you are 25 years old and want to start your retirement planning journey through NPS or EPF, which of the two can help you create a larger corpus with an Rs 1,20,000/year step up investment till you turn 60 years old? Know here –

What is EPF?

EPF is a retirement savings scheme for private sector employees where an employee and employer contribute monthly to the former's retirement corpus.

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The scheme also provides the facility of a monthly pension under Employees' Pension Scheme (EPS).

It's a fixed interest rate scheme where the current rate is 8.25 per cent compounded yearly.

The employer's contribution also goes to the employee's EPS account, which provides a monthly pension at the retirement age of 58.

The minimum EPF investment a month is Rs 1,800, while the maximum is 12 per cent of the basic pay and dearness allowance (DA) of an employee.

The amount invested, the interest earned, and the corpus generated are tax-free as EPF comes under the exempt-exempt-exempt scheme.

Contributions up to Rs 1.50 lakh in EPF in a financial year provide a tax benefit under the old tax regime..

What is NPS?

Started for central government employees in 2004, the retirement savings scheme was opened to all in 2009.

It's a market-linked scheme where an NPS account holder can invest up to 75 per cent of their amount in Nifty 50-linked retirement mutual funds and at least 25 per cent in fixed interest assets such as corporate and government bonds.

The employee can contribute a minimum of 10 per cent of their basic pay and DA to their NPS account.

If they work in a private sector company, the employer may also contribute an equal 10 per cent amount to the employer's NPS account.

In case of a central government job, the employer contribution range is 14 per cent.

In the new tax regime, NPS contributions from the employer side provide tax benefits to an employee.

In the old tax regime, NPS contributions can also provide additional NPS tax benefits of up to Rs 50,000 under Section 80CCD(1B).

The annualised returns in NPS are not fixed. However, if we look at the 10-year return chart, NPS Tier schemes have given annualised returns in the range of 11.63 per cent-12.89 per cent. .

Calculations for story

We will calculate the corpus created in 35 years from NPS and EPF on an Rs 1,20,000/year contribution, which is boosted by 5 per cent every year.

For EPF calculation, we will take 8.25 per cent interest, while for NPS, we will take a 12 per cent annualised return. .

Retirement corpus created from EPF contributions

We are expecting a starting Rs 5,000 contribution from the employee and a Rs 5,000 contribution in a month in the 1st year.

We will increase the contribution 5 per cent every year. Here's what estimated readings may look like in 35 years.

Employee contribution in EPF in 35 years- Rs 57,50,184

Employer contribution in EPF in 35 years- Rs 55,16,472

Total contribution in 35 years- Rs 1,12,66,656

Employer contribution in EPS in 35 years- Rs 43,23,672

Total estimated retirement corpus in 35 years- Rs 4,57,15,219

Retirement corpus created from NPS contributions

In 35 years, the total investment will be Rs 1,08,38,437.

The estimated corpus created in 35 years will be Rs 9,96,96,098.

The lump sum amount at a 60 per cent withdrawal rate will be Rs 5,98,17,659.

The annuity amount at a 40 per cent withdrawal rate will be Rs 3,98,78,439.

If one gets a 7 per cent return on annuity, the expected monthly income will be Rs 2,32,624.

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)