Government employees invest 10% of their salary in NPS. At the same time, the central government and state governments contribute 14% from their side, but due to various restrictions imposed by the government, they are not able to get high returns on investment.
The central government has come up with Unified Pension Scheme (UPS) for its employees. In this new pension scheme, there is a provision to give fixed pension to the employees. Also, the pension amount will be increased even if inflation increases. Due to this, the pension of employees working in the government sector will increase over time. However, no change has been made for employees working in the private sector. In such a situation, how can private sector employees get pension equal to UPS by using National Pension System (NPS) + Employees Provident Fund (EPF). Let’s try to understand through calculation.
More pension than UPS possible in NPS
If you are starting a job in the private sector, in which you get a basic salary of Rs 14,000 and an annual salary increment of 10%, then you can get Rs 2.9 lakh as monthly pension by continuously contributing to the Employees Provident Fund (EPF) and National Pension System (NPS). This amount will be much more than your last basic salary of Rs 2.44 lakh after 30 years of service.
NPS is best for private sector employees
Government employees invest 10% of their salary in NPS. At the same time, the central government and state governments contribute 14% on their behalf but due to various restrictions imposed by the government, they are not able to get high returns on investment. For example, the maximum investment in equity in NPS of government employees is limited to 15%. Up to 95% of NPS assets for government employees can be invested in infrastructure/debt funds and up to 5-15% in equity. Hence, the total returns earned under this government scheme are very low at around 10%.
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On the other hand, private sector employees, who have opted for the 10% contribution to NPS by their employer as part of salary, enjoy more flexibility. They can invest up to 75% in equities. Since equities are known to offer high returns in the long run, private sector employees can build a much larger corpus. Private sector employees can now opt to invest 14% of their basic salary in NPS and get income tax deduction for it. Higher contributions can help them build an even larger retirement corpus.
Can also get assured pension
The biggest attraction of a government pension scheme is the assurance of getting 50% of the last drawn basic salary as an assured pension. It is a big psychological boost that even after serving a long period in government service, one can get at least half of his salary as regular income during retirement. For private sector employees, it is not a very difficult goal to have a decent corpus regularly.
For example, 24% of the basic salary goes towards EPS, employer’s EPF contribution and employee’s EPF contribution. Under the old tax regime, employers could contribute 10% of the basic salary to NPS. This is eligible for deduction under section 80CCD(2). Moreover, under the new tax regime, the deduction limit has been increased to 14% of the basic salary, which will help employees build a bigger NPS corpus. If you have been making these contributions without a break throughout your service period, you can get more than 50% of your last salary as pension.
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