Retirement fund body Employees’ Provident Fund Organisation (EPFO) is toying with the idea of bringing out a new pension product for organised sector workers not covered under the Employees’ Pension Scheme (EPS), 1995. As of now, it is compulsory for employees earning a basic salary plus dearness allowance (DA) lower than ₹15,000 to get enrolled in the EPS. However, since the pension is meagre, there are talks of the new scheme being formulated.
The proposal on this new pension product is expected to come up for discussion in the meeting of EPFO's decision making body Central Board of Trustees, scheduled to take place on March 11 and 12 at Guwahati, Hindustan Times reported.
There is no denying the fact that the pension from EPFO is too paltry to cover expenses in the post-retirement life, it is vital to supplement the income by investing in a series of pension schemes such as NPS (National Pension System), PPF (Public Provident Fund) and even mutual funds.
Some of the popular saving instruments used for retirement:
National Pension system (NPS): The NPS is a government-run market-linked pension savings vehicle. The NPS is reliant on the success of pension fund management and the market. The NPS is not a fixed-return instrument and so it is not risk-free. The NPS returns are determined by the performance of pension fund managers, and subscribers have the option to switch between them.
Public Provident Fund: PPF is a government-backed savings vehicle with quarterly fixed returns determined by the government. The PPF isn’t just for pensions or retirement; it can also be utilised for other financial goals also. The PPF has a 15-year tenure. After the end of the sixth financial year, i.e. the beginning of the seventh year, investors are permitted to make partial withdrawals.
We showcase some of the key differences between NPS and PPF:
| National Pension System (NPS) | Public Provident fund (PPF) |
| It is a government-run market-linked pension savings vehicle. It is reliant on the success of pension fund management and the market. | It is a government-backed savings vehicle with quarterly fixed returns determined by the government. It isn’t just for pensions or retirement only. |
| The NPS returns are determined by the performance of Pension Fund Managers, and one can change managers if unhappy with their performance. | The government announces the returns on the PPF. |
| The returns are determined by the performance of NPS funds. It’s worth noting that an NPS allows for a maximum equity investment of 75 per cent | The PPF has a set rate of return. Every quarter, the exact rate is determined. In the past, rates have fluctuated around eight per cent per year. |
| Section 80C allows you to deduct up to ₹1.5 lakh in NPS contributions. However, such contributions cannot exceed 10 percent of your annual pay. NPS also qualifies for an additional tax deduction under Section 80 CCD (1B). | PPF interest is also tax-free, although it must be reported on the annual income tax return. The amount invested in a PPF at maturity is likewise tax-free. |
Mutual Funds: A mutual fund is an investment tool where many individuals pool their money to invest in financial securities such as stocks. It is a fund managed by professionals known as portfolio managers or fund managers.
One of the many benefits that investors get is that these give them the opportunity to access a professionally-managed portfolio. Like other investments, it has its risks which one must consider before investing. But if at any point you find that you are losing your money, you can easily sell your stock.
Employees’ pension scheme: EPS is a government, guaranteed return scheme, with zero investment risk. If an employee is below 58 on the date of exit, one can take a scheme certificate under EPS rather than the lump sum withdrawal. Investor becomes eligible for scheme certificate after 10 years of service.
And if one has a scheme certificate with service record of over 10 years, you become entitled to receive a monthly pension starting the age of 58, or early pension at 50.
One can even apply for complete withdrawal from EPF and EPS in case the policy holder lost his job and is unemployed for more than two months, and the total number of years of service is fewer than 10.
So, we can see that small investors have options galore to choose from when it comes to saving for retirement. It’s imperative to weigh all the pros and cons before opting for a scheme.