The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Ambikesh Mishra, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur
The New Pension Scheme (NPS) which was supposed to be an answer to USA’s retirement scheme 401(k) which was until not so successful seems to have found a new lease of life. The financial planners are also recommending their clients to put NPS in their investment basket. Some even considering NPS as a replacement of the Employee provident fund (EPF).
EPF has certain drawbacks, for example, it requires at least 5 years until you can get advantage from EPF. Any premature withdrawal results in tax deductions. Also the EPF facility is for the salaried class and employees from the unorganised sector do not get the advantage of this scheme.
On the other hand, NPS is available to anyone working in the organised or unorganised sector. The second main difference is in the form of investment of your pooled money. In case of EPF your money can only be invested in Government bonds/securities and has an upper limit as to how much return can your money earn, but NPS gives a whole range of options from Govt. securities to corporate bonds, from municipal bonds to Equity shares. A person with some financial knowledge can customize his portfolio according to his risk appetite.
More importantly, in the Budget 2015, Finance Minister Arun Jaitley has given a huge boost to NPS by allocating a separate tax deduction of Rs 50,000 under Section 80CCD, over and above the exemption of Rs 1.5 lakh under Section 80C. Thus, the total tax deduction for investors in NPS stands at a maximum of Rs 2 lakh, making it one of the most attractive investment schemes for taxpayers. Besides, employees are also allowed to choose between EPF and NPS.