EPF or NPS as a Retirement Solution: Evidence from Private Bank Employees of India

Abstract

The objectives of the study are to document the various determinants of EPF and NPS as a retirement plan and to suggest strategies for their efficient management to optimise the returns. Based on websurvey, a sample size of 170 respondents, the empirical results have indicated that EPF lacks flexibility; NPS enjoys few benefits but suffers from lack of maturity tax benefits. The fund managers should carry out more marketing to make the NPS more popular and the government should ensure parity in the tax treatment akin with other long term savings schemes. The study acknowledges its few limitations.

JEL Classification: G11, G18, H53, H55, H75.

Introduction:

Within the consumer financial behaviour discourse, much more attention has been given to the consumption of credit [Dodd, 1994; Berthoud & Kempson, 1992; Ford & Rowlingson, 1996], various types of money transmission services and the way household finances are organized [Erlichman, 1994; Volger & Pahl, 1993; Allen, 1985] than to the ways in which individuals choose to invest. Money management during post-retirement years can be a herculean task. Rajan, Mishra, & Sharma (2002) reported that prior to independence, no benefit as an old-age pension existed in India for the industrial workers or for workers in general. The Adarkar Report of 1944, however, laid the groundwork for a social security system in India. A few years later, specific mention was made about social security in the new Constitution in Article 41 of the Directive Principles of State Policy. In case of those retiring at 60, many have another 25-30 years to live and a wrong asset allocation could lead to a situation where they outlive their savings, with no regular salary income to make for the shortfall amount. Provident fund (PF), gratuity and pension come under the ambit of retirement benefits.

Retirement benefits may be in the form of defined contributions (DC) or defined benefit (DB); hence, the method of accrual, mode of withdrawal and tax impact varies. Mandatory retirement benefits include gratuity, provident fund and pension as governed by the Employees Pension Scheme (EPS) and the National Pension System (NPS) as managed by Pension Fund Regulatory and Development Authority (PFRDA). In a DB scheme, the employees receive an income based on their final salary. A DC scheme, as distinct from DB scheme, caps the financial obligations of the pension provider and the value of the pension will depend on the corpus available on retirement with no assurance on the quantum of pension value to the beneficiary. Hence, the risks of return on the pension fund get transferred to the employees from the employer.

NPS is a ‘pay as you go’ (PAYG) scheme that allows the investor to accumulate their savings until they turn 60 years of age. The central government employees of st India who joined on or after January 1 , 2004 compulsorily contribute 10 percent of their basic plus dearness allowance (DA) in Tier-I of NPS. For individuals working in private companies in the organized sector, the minimum contribution is INR 0.006 million per annum. The workers in the unorganized sector have to contribute a minimum of INR 0.001 million and maximum INR 0.012 million annually in a separate scheme called Swavalamban, where the government pays a subsidiary of INR 0.001 million annually for each individual. The employee carries the entire investment risk. The government contributes matching grants to the corpus for its staff, but there is no such contribution for the nongovernment employees from their employers with the exception of some organized sectors. The PFRDA, for striking a balance between risk and return offers the ‘auto choice’ scheme where the proportion of exposure to equity and government bonds is based on the investors’ age. The investors have the flexibility to change the fund manager, as well as rejig the allocations once a year. The contribution of the employee is allowed as deduction under section 80CCD (1) of the Income Tax Act, 1961 up to INR 0.15 million, and under sub section 1B of the same section an additional deduction of INR 0.05 million making a composite deduction of INR .20 million from the assessment year 2016-17 and subsequent assessment years; but maturity amount is taxable

The Employees’ Provident Fund (EPF) was instituted by an Act of Parliament in 1952 for providing social security benefits to the work force engaged in the nongovernment sector. Employees’ contribution to the EPF comprises of 12 per cent of the Basic + DA + the cash value of food allowances. An equal amount of 12 per cent is contributed by the employer too, to the fund. For those who have a basic salary of up to INR 0.015 million, contributing to the EPF is mandatory. Backed by the government, it guarantees safety of principal as well as the interest earned, making it suitable for long term financial goals. The contributions you make towards provident fund is allowed as a tax deduction under section 80C, up to a maximum limit of INR 0.15 million p. a. Also, the maturity proceeds are tax free, if contributions to the fund have been for more than five years.The complete amount from PF could be withdrawn on Retirement at the age of 55 years or due to early retirement on account of some disability, etc.

The purposes of this study are to document the various determinants of EPF and NPS as a retirement solution and to suggest strategies for their efficient management to optimise the returns.

The next section, Conceptual Framework, explains the theoretical perspective on which the research hypotheses are developed. The research gap along with the scope of the study is discussed in section 3 followed by a description of research methods adopted for this study in section 4. Section 5 presents the results of the study and discussion is offered in Section 6. The conclusions of the study are drawn in section 7 and Future Research Directions are enumerated in section 8. The last section of the study offers the scope for implementations of the findings.

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