But be prepared for lock-in until the age of 60.
Sanjay Kumar Singh finds out extra,
With curiosity earnings on provident fund contributions above Rs 2.5 lakh turning into taxable, many individuals are considering shifting the cash they contributed to Voluntary Provident Fund (VPF) to the National Pension System (NPS).
They ought to perceive the professionals and cons of the 2 merchandise earlier than making a call:
Risk and return
From April 1, the speed of return on Employees Provident Fund (EPF) might be 8.5 per cent on contributions until Rs 2.5 lakh.
Interest on contributions above Rs 2.5 lakh might be taxed on the slab fee.
For somebody within the 30-per cent tax slab, the post-tax return on such contributions might be 5.85 per cent.
“EPF has zero credit score danger since it’s backed by the federal government. A post-tax fee of 5.8 per cent from a government-backed instrument stays engaging within the present state of affairs,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered funding advisor.
Among government-backed devices, Public Provident Fund (PPF) affords 7.1 per cent tax-free.
“Many individuals contribute to EPF, however to not PPF. After the Budget, it shouldn’t occur that they make investments greater than Rs 2.5 lakh in EPF and VPF, however nothing to PPF. That can be a mistake,” says Raghaw.
The danger in EPF is that it affords an above-market fee of return.
“If the EPF fee is linked to market charges, its return might come down sooner or later,” says Arnav Pandya, founder, Moneyeduschool.
NPS is a market-linked instrument with out assured return.
It is a hybrid product with each an fairness and a debt part.
“Investors can allocate to equities in NPS and may probably earn a higher fee of return over the long run. But they should be ready for volatility,” says Arvind Rao, chartered accountant and founder, Arvind Rao & Associates.
Employees could make partial withdrawal from EPF in sure circumstances: in case of unemployment; to buy or assemble a home; to fund an sickness, and so forth.
You must have been a member of EPF for a minimal variety of years.
The quantity that may be withdrawn additionally varies in every of those instances.
The guidelines for partial withdrawal from NPS are tighter.
You can withdraw solely 25 per cent of your personal contribution.
You cannot withdraw both the employer’s contribution, or the return earned on the deposits.
If you exit prematurely from NPS, then 80 per cent of the corpus should be annuitised.
As talked about, in EPF curiosity earned on contributions above Rs 2.5 lakh might be taxed.
“This will have an effect on individuals who have a primary earnings of above Rs 1.74 lakh, or whose EPF+VPF contribution exceeds Rs 2.5 lakh,” says Raghaw.
In NPS, the ultimate corpus is taxed as follows: 40 per cent might be withdrawn lump-sum and is tax free.
Another 40 per cent should be annuitised.
Income from an annuity is taxed on the slab fee.
The steadiness 20 per cent might be withdrawn lump-sum, by which case it is going to be tax-free.
If it’s annuitised, then earnings from the annuity might be taxed.
What must you do?
If you need assured, risk-free returns, then contribute Rs 2.5 lakh through the EPF/VPF route.
Then utilise the Rs 2.5 lakh restrict on PPF.
Any quantity above this contributed to VPF will earn a post-tax return of 5.8 per cent.
If you need higher returns, and are ready for volatility, choose for NPS.
But be ready for the lock-in until 60.
You should even be comfy with obligatory annuitisation.
If you aren’t, then spend money on NPS solely as much as Rs 50,000 to avail of the tax deduction.
Feature Presentation: Ashish Narsale/Rediff.com