Retirement planning for high-paid employees is no longer as easy as before. Especially for people earning Rs 50 lakh annually, it has become important to understand not only safe returns but also tax savings and future needs while choosing between Voluntary Provident Fund (VPF) and NPS.
Changed tax rules on PF
If the annual salary of an employee is Rs 50 lakh, then his basic salary can be considered to be around Rs 25 lakh. In such a situation, the mandatory EPF contribution of the employee is approximately Rs 3 lakh annually. According to the current rules, only the interest received on the employee’s PF contribution up to Rs 2.5 lakh is tax free. Interest received on contributions more than this becomes taxable.
This is the reason why for high earning employees the benefit of depositing extra money in VPF is no longer as attractive as before.
Why is Corporate NPS in discussion?
Interest in Corporate NPS has increased in the new tax system. The biggest reason for this is tax exemption. Contribution made by the employer to NPS helps in reducing taxable income under Section 80CCD(2). This means that the employee keeps investing for retirement and can also take advantage of tax saving.
Experts believe that in the new tax system, for high salaried people, the option of Employer NPS along with EPF can prove to be more tax efficient in many cases.
VPF’s biggest strength
However, the importance of VPF has still not diminished. In this, government backed secure returns are available and the entire amount can be withdrawn tax free if certain conditions are met. For those who do not want to take risk and prefer stable returns, VPF is still considered a reliable option.
There is market risk in NPS
A part of the investment in NPS is market linked, hence there is a risk of fluctuations in it. Also, at the time of retirement only 80% of the amount can be withdrawn tax free. It is necessary to buy annuity with the remaining 20% amount, on which the pension received comes under the ambit of tax.
What is the right decision?
According to experts, the decision completely depends on the need and investment thinking of the person. If the priority is safe and stable returns then VPF may be better. At the same time, people who want tax savings and higher returns in the long term can consider Corporate NPS. That means, for those earning Rs 50 lakh annually, now the question has become not only of investment but also of correct tax planning.
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