Choose NPS over EPF for maximum post-tax returns

I am 38 years old. I am joining a new company soon. My new employers are willing to structure my salary within the overall agreed cost to company package of Rs 24 lakhs. Please advise me whether I should opt for Employee Provident Fund (EPF) or National Pension Scheme (NPS), or both to build a retirement kitty.
—Kriti  Ahuja

EPF is a decent long-term debt instrument with a moderately low-risk profile. Your employers contribution is tax exempt up to 12% of your basic salary. Out of the amount contributed by your employer, an amount of Rs 541 per month will be transferred to a pension-fund account that gives rather poor returns. The balance amount of your employers contribution and your matching contribution of 12% of basic is transferred to your EPF account that earns like a debt fund. The money is locked in till you retire. The maturity benefit is tax-free.

Overall, despite the several unfriendly features such as the deduction towards the low-return pension fund and the lock-in and poor administrative features, the overall post-tax returns should give you returns just in excess of inflation.

In NPS, you can chose an investment option of 50% equity and 50% debt. Employers contribution to NPS is exempt  upto 10% of your basic and you can contribute up to Rs 50,000 per annum for an extra deduction under section 80C. The money is locked in till retirement. On maturity, you can withdraw up to 60% of the amount and withdrawal up to 40% of maturity is free.You have to compulsorily buy an annuity with the balance amount. The annuity receivable is taxable like any other income as per the slabs prevailing in the year in which the annuity amounts are recieved. Despite the tax unfriendly treatment on  maturity, it should provide you pretty decent post-tax returns in line with what you would receive on a conservative balanced fund.

Another option is to ignore both EPF and NPS and just increase the amount of SIPs in equity mutual funds or may be even in balanced mutual funds to get some debt exposure as well. This has no liquidity constraints, no usage restrictions, and maturity proceeds are tax free.

This is likely to give the highest post tax return despite not getting specific tax deductions.  These strengths are its drawback as well. Because there is no compulsion to save there can be tendency to stop contributing especially if the markets are down for a prolonged phase. Easy liquidity means there is temptation to use the money well before retirement.

If you wish for a pre-committed method of investment for retirement, first choose NPS  (with the employer contributing 10% and you contributing Rs 50,000 per annum), and if you can still afford to invest some more then you can choose EPF as well. Make sure you let your new employer know about your existing EPF account, if any, so that a new EPF account is not opened by mistake.