For young salaried employees, the Employees’ Provident Fund (EPF) is often the first step towards building a retirement corpus. But should investors who already contribute to EPF also put money into the National Pension System (NPS)?
Experts say the two need not be viewed as competing retirement products. While EPF provides a relatively stable retirement foundation, NPS can add market-linked exposure and greater flexibility in asset allocation. For investors in their 20s and early 30s, a long investment horizon also gives their contributions more time to compound.
The decision, however, should depend on the retirement corpus required, existing savings, risk appetite and liquidity needs rather than tax benefits alone.
EPF alone may not be enough for a long retirement
EPF can form an important part of retirement savings, but investors need to assess whether the corpus it is likely to generate will be sufficient to fund potentially two or three decades after retirement.
“EPF creates an important retirement foundation, but it may not by itself deliver the corpus required for a retirement that could last two or three decades,” said Sumit Shukla, MD & CEO, Axis Pension Fund.
According to Shukla, investors should first estimate the retirement corpus they will require, assess how much their existing EPF savings could contribute towards that target and then identify the gap.
Pranay Ranjan Dwivedi, Managing Director & CEO, SBI Pension Funds, also views EPF and NPS as products that can coexist in a retirement portfolio. EPF is oriented more towards stability, with an interest rate declared periodically, while NPS provides a market-linked component.
Rather than asking whether to choose EPF or NPS, Dwivedi said investors should consider whether they are saving enough for retirement and whether their retirement portfolio is adequately diversified.
NPS can add equity exposure and diversify your retirement savings
A key difference between the two products is how the money is invested.
EPF follows a prescribed investment framework, and individual members do not determine their asset allocation. NPS gives subscribers greater choice across equity, government securities and corporate bonds, besides allowing them to select their pension fund.
Under Common Schemes, equity exposure in NPS can go up to 75%, while eligible schemes under the Multiple Scheme Framework can provide equity exposure of up to 100%, according to the experts.
This can give younger investors an opportunity to take greater market exposure when retirement is still several decades away.
Shukla described EPF as the “stability anchor” and NPS as the “flexible growth layer” of a retirement portfolio.
Investors who do not want to actively manage their asset allocation can also consider NPS’s Auto Choice option. Under this approach, the allocation changes with age, gradually shifting from equity towards fixed-income investments as the subscriber moves closer to retirement.
Starting NPS at 25 can give your retirement corpus decades to grow
For investors between 25 and 30, time can be one of the biggest advantages when saving for retirement.
Shukla suggested that a practical starting point could be around 5% of take-home income in NPS, with contributions gradually increased as salary rises. Starting with a relatively small contribution at 25 can be more effective than waiting until 40 and then trying to compensate with substantially higher contributions, he said.
Dwivedi similarly said a young investor can start with a modest amount and increase it as income grows. With retirement potentially 30–35 years away, early contributions get several decades to compound.
The asset allocation need not remain unchanged throughout this period. Young investors may initially be able to take higher equity exposure and progressively move towards fixed income as retirement approaches and protecting the accumulated corpus becomes more important.
Don’t sacrifice emergency savings for retirement planning
The case for starting retirement investments early does not mean young investors should lock away money they may need for emergencies.
Shukla said an emergency fund should take priority over additional NPS contributions, although investors do not necessarily have to stop retirement savings while building that buffer.
The emergency corpus should cover essential expenses and remain in accessible instruments. Health insurance and, where necessary, term insurance are also important so that an unexpected expense does not force an investor to dip into long-term savings or take expensive debt.
Liquidity is particularly relevant because NPS Tier I is designed primarily for retirement. Partial withdrawals are permitted only for specified purposes and subject to applicable conditions.
Dwivedi said investors can therefore build an emergency cushion and start retirement investing simultaneously, keeping their initial NPS contribution at a comfortable level and increasing it as their income and financial position improve.
For young employees who already have EPF, the decision to add NPS ultimately comes down to the adequacy of their retirement savings. EPF can provide the stable foundation, while NPS can add market-linked growth and asset-allocation flexibility. But before committing more money to a long-term retirement product, investors should ensure that they have enough liquidity to deal with their more immediate financial needs.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.