Budget 2016 announced that ONLY 40% of your EPF (Employees Provident Fund) is tax free. Similar is the situation with NPS & superannuation fund and recognised provident fund. The balance 60% is now going to be taxed and this has created a furore. Relax! Things are actually better now.

Firstly, note that your corpus accumulated till 31^st March 2016 will continue to be tax free! Secondly, this tax applicable ONLY on the corpus created from your contributions made after 1^st April 2016.

Our verdict is: Move to NPS, it is now a far superior product than the EPF.

Now… will this move by FM, affect your retirement kitty? Will it make EPF obsolete? Should we start contributing towards NPS? These are questions ringing in the minds of common man.

Let us try to explain the situation to you via an example.

The EPF Situation

1. Consider an individual & his company together contribute Rs. 10,000 into EPF for the next 25 years. Each year contribution increase @ 5% p.a. to allow for increase in salary.
2. If the EPF continues to earn 8.8% p.a. for the next 25 years the corpus would become approximately Rs. 1.6 crores.
3. Out of this kitty of Rs. 1.6 crores, approximately Rs. 64 lakhs is tax free (40% of the corpus)
4. For the balance 60% you have two options;
   • Option 1 – Pay tax @ 30%: On the balance amount of Rs. 96 lacs you pay 30% income tax. Hence after tax you will be left with approximately Rs. 67 lacs. So in this option the total money in your hand via EPF will be approximately Rs. 1.31 crores.
   • Option 2 – Save tax and buy annuity: The entire 96 lacs will be tax free as you are buying an annuity plan. To summarise, in this option your cashin hand will be Rs. 64 lacs and you will have annuity plan of Rs. 96 lacs.

The NPS Situation

1. Consider an individual & his company together contribute Rs. 10,000 into NPS for the next 25 years. Each year contribution increase @ 5% p.a. to allow for increase in salary.
2. If NPS earns 12% p.a. (which is possible provided you opt for Asset E which has an equity allocation of 50%) for the next 25 years the corpus would become approximately Rs. 2.5 crores.
3. This kitty of Rs. 2.5 crores can be split into three parts for better understanding;
   • Part 1 – 40% of corpus: Approximately Rs. 1 crore is tax free (40% of the corpus).
   • Part 2 – 20% of corpus: From this 20% i.e. Rs. 50 lacs you will have to pay 30% tax. Hence you will have Rs. 35 lacs post tax.
   • Thus you will have the total of (a) & (b) which is Rs. 1.35 crores of cash in hand.
   • Part 3 – 40% of corpus: The remaining 40% which is about Rs. 1 crore will be used to buy an annuity plan.
4. So total money in hand via NPS after 25 years will be approximately Rs. 1.35 crores. This is more than what you would have via EPF in either of the options shown above (over the years it is quite likely the EPF rate of return would fall significantly)
5. To summarise, in this situation your cash in hand will be Rs. 1.35 crores PLUS you will have annuity plan of Rs. 1 crore.
6. Thus NPS is now a far better investment vehicle for your retirement planning.

Once again in a different way, your likely networth at retirement;

Via EPF is expected to be Rs. 1.60 crores (Rs. 64 lacs cash in hand & annuity of Rs. 96 lacs)

Via NPS is expected to be Rs. 2.35 crores (Rs. 135 lacs cash in hand & annuity of Rs. 100 lacs)