Which retirement investment wins? Expert breaks down EPF, NPS, mutual fund returns, tax implications

Retirement savings: In a recent YouTube session, retirement and investment consultant Amit Upadhyaya shared insights into the advantages and limitations of Employees' Provident Fund (EPF), National Pension System (NPS), and mutual funds, three popular avenues for building a retirement corpus.

Upadhyaya noted that many salaried employees often focus on their in-hand salary, reducing contributions to EPF and NPS to increase take-home pay. “Theoretically, investing in mutual funds seems better due to higher returns and no lock-in,” he said. “But have you tested this logic in real life?”

EPF, India’s oldest social security scheme, guarantees an 8.25% return. Contributions up to Rs 1.5 lakh annually are tax-exempt, and the maturity amount is fully tax-free. Upadhyaya highlighted that both employer and employee contributions fall under the Exempt-Exempt-Exempt (EEE) tax structure, making EPF particularly attractive for debt allocation in a portfolio. A monthly investment of Rs 27,000 from age 30 can potentially grow to Rs 5 crore by 60.

"EPF gives an 8.25% return. NPS gives lower returns than mutual funds, and on top of that, it has such a long lock-in period. It's better to increase the in-hand salary, save from it, and invest in mutual funds where one can get more than a 12% return, and there's no lock-in," Upadhyaya said. 

NPS offers market-linked returns through a mix of equity and debt, with equity exposure ranging from 25% to 75%. While government employees contribute up to 14% of their salary, private-sector employees typically contribute 10%. NPS features two accounts: Tier I, strictly for retirement with a lock-in until 60, and Tier II, which allows flexible investing. Upadhyaya emphasized that the employer’s contribution is pre-tax and tax-exempt, while employee contributions are post-tax but eligible for deductions under Sections 80CCD(1), 80CCD(1B), and 80CCD(2). He noted that at retirement, up to 60% of the corpus can be withdrawn, with the remaining 40% mandatorily used to purchase an annuity.

Mutual funds—equity, hybrid, and debt—offer flexibility and growth potential. Equity funds target high growth, hybrid funds balance growth and stability, and debt funds prioritize safety. Investments in Equity Linked Savings Schemes (ELSS) up to Rs 1.5 lakh qualify for tax benefits under Section 80C. However, Upadhyaya cautioned that returns are taxable upon redemption, and contributions come from post-tax salary. For instance, a 30% tax bracket reduces a Rs 10,000 monthly investment to Rs 7,000, affecting the long-term corpus.

Comparing returns over 25 years, Upadhyaya illustrated that EPF could yield approximately Rs 99 lakh, NPS Rs 1.33 crore, and mutual funds around Rs 1.19 crore after accounting for taxes, demonstrating the hidden advantage of tax-free growth in EPF and NPS. He concluded that while mutual funds offer higher nominal returns, NPS is the superior long-term retirement tool due to tax efficiency and guaranteed post-retirement annuity. EPF remains an excellent fixed-return instrument, especially for debt allocation in a diversified retirement portfolio.

"NPS is the outright winner. It would be a mistake to opt out of it. Especially in the old tax regime, you will also get a tax benefit on the employee's contribution. But the tax benefit on withdrawal is also a very significant factor, so it should not be ignored," Upadhyaya advised the investors.

"If I share my personal experience, I opted for EPF in my first job in 2001 and never withdrew it. In 24 years, it has grown to cross ₹1 crore," he added.

Upadhyaya urged employees not to ignore employer contributions to EPF and NPS, which can provide a 30% effective return upfront. Sharing his personal experience, he revealed that his first EPF investment in 2001 has grown to over Rs 1 crore today, underscoring the power of disciplined, tax-efficient investing.