Retirement is an important and inevitable part of financial planning. To financially secure yourself in your golden years, it is crucial to identify and invest in instruments to achieve the desired results. The recently released Saving Quotient study reveals that the percentage of people with a retirement corpus target of Rs. 2 crore or more has gone up to 25%. This indicates that more and more people have realised the need for consistent and long-term investing and planning.
It’s also important to understand that you can reap the best benefits of investing when you start from an early point in your working life. This could help you build a big corpus for your retirement years.
Early jobbers — those in their early to late 20s — have realised the importance of savings and acknowledge how intelligent use of funds ensures fulfilment of long-term goals, including retirement. With a high risk appetite and abundant time, early jobbers are best-placed to hit any ambitious retirement goal if they pick the right investment tools and invest in them smartly and in a disciplined manner.
When it comes to investment for your retirement, there are two popular options available in the market, i.e., the National Pension Scheme (NPS) and Employees Provident Fund (EPF). NPS is a comparatively new option than the EPF but comes with an array of benefits. Both are a great way to build a retirement fund.
If you are an early jobber, investing in NPS, in addition to EPF, can be a very good option. Here is a quick look at the various features of NPS that makes it a good choice for early jobbers.
Benefits Of Investing In NPS For Early Jobbers
National Pension Scheme is a market-linked government-backed investment product that requires regular voluntary contributions. As an NPS investor, your money is allocated to debt and equity securities in the ratio appropriate for your age and risk appetite. Among debt securities, you have the option of government bonds and corporate debt. This mixture can provide above-average returns while ensuring a high degree of capital safety. Investors can choose their own equity to debt ratio as per their investment goals. However, equity investments are capped at 75% of the portfolio for investors up to 50 years of age, and this percentage tapers with age.
Unlike NPS, EPF is a mandatory savings scheme for salaried employees of an organisation who have more than 20 employees or for employees whose salary is above the minimum amount stipulated. EPF provides an assured return at the rate decided by the EPFO from time to time. Since EPF investment is mandatory, an employee has to contribute a minimum of 12% of their monthly salary towards it. The employer is also mandated to contribute 12% of the employee’s basic salary to this fund. With a rise in income, your EPF contributions also increase helping you build a sizeable corpus. But investors should not try to touch this corpus before maturity for meeting their short-term fund requirements. Also, investors can increase their contributions to EPF through the Voluntary Provident Fund mode up to 100% of their basic salary plus dearness allowance.
Now, as a young investor, if you invest in NPS, you get the opportunity of investing in an equity-oriented manner, which increases your chances of earning high long-term returns. With age, you can gradually lower your equity exposure, converting the investment into a debt-oriented one that offers greater stability along with moderate returns.
NPS allows an additional tax deduction benefit of Rs. 50,000 under Section 80CCD (1B), which is over and above the Rs. 1.5 lakh available under Sec 80C of the I-T Act. So the total deduction benefit that NPS investments can provide is Rs. 2 lakh. On the other hand, EPF allows tax deduction benefit for a maximum amount up to Rs. 1.5 lakh. Therefore, investing in NPS allows for additional tax saving and an opportunity to earn a higher return.
If a young investor invests in both NPS and EPF, he can enjoy the benefits of equity-linked returns through both. The NPS allows 75% exposure of the corpus in equities, which helps in faster wealth building. The EPF invests 15% of the corpus into equities.
Points To Keep In Mind When Investing In NPS
As an NPS investor, you can withdraw 60% of the corpus tax-free on retirement, whereas the remaining 40% has to be mandatorily used for purchasing an annuity plan. Later, the annuity income is taxed as per your slab rate. On the other hand, an investor can withdraw his EPF corpus on retirement completely and tax-free.
For an existing investor of EPF, additional investment in NPS could allow you a chance to earn a high return through equity exposure and enjoy additional tax deduction benefits. Therefore, instead of going for any one option, you may get more stability and better returns if you invest in both EPF and NPS.
While planning for your retirement, diversification plays a crucial role in cutting down investment risk and ensuring a stable return on your portfolio. So, when you are young and have a high-risk appetite, you should also explore other investment avenues such as equity mutual funds, debt funds, bank FDs and gold, etc. according to your returns expectations and liquidity requirements. These investments can allow you greater liquidity than NPS.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.