For a long time our grouse with the retirement benefit system in our country has been that it doesn’t do justice to both
For many salaried Indians, their only saving for retirement is their EPF& superannuation. It gets automatically deducted, is equally contributed to by the employer and gives assured high returns. Tax benefits are thrown in for addedimpact.
In the early 90s, EPF gave interest 12%, stock markets were riled in scams and highest tax rates went upto56%. Then, EPF made a lot of sense as a safe and tax free investment option for retirement.
Today, times have changed. Interest rates, personal income tax rates are both going down. What is going up is cost of living and life expectancy.
Retirement benefits, which are supposed to come in handy after the earning years of an employee last for, on an average 7 – 8 years after retirement. Meaning, by the time a person is 68 he has run out of his retirement money.
The challenge in front of us, is to ensure the money last for longer.
Retirement corpuses are built over 25 – 30 years. In such a long time frame, equities become risk free and the power of compounding can create magic.Staying invested in so called ‘safe’ investments over such a timeframe would cost employees over 50% of their money. And that is tragic.
NPS has helped a bit. By exposing part of the money to equities it gives a better chance for the money to do well.
But what about money already accumulated in EPF?
The recent provision to transfer money accumulated in EPF and Superannuation accounts to NPS, without any tax implication is a welcome move.
If an employee has at least 5 years to go before they are due for retirement, they should definitely use this facility and transfer money to NPS. And also simultaneously hope and pray that the tax treatment of NPS will change before they retire so they can enjoy a larger corpus coming tax free!