What are the pros and cons of withdrawing or continuing with your EPF balance while joining a new job and investing in the NPS?

EPF (Employee Provident Fund) and NPS (National Pension System) are two popular retirement savings schemes in India. When an employee leaves a job and joins a new one, they have the option to either withdraw their EPF balance or continue with it, and they also have the option to invest in the NPS. Here are the pros and cons of both choices:

Withdrawing EPF balance:

Pros:

1. Immediate liquidity: Withdrawing the EPF balance provides immediate liquidity, which can be useful for meeting short-term financial needs or for investing in other opportunities.
2. No restrictions on usage: There are no restrictions on the usage of the withdrawn EPF balance. The employee can use it for any purpose they deem fit, including paying off loans or investing in stocks, mutual funds, or other financial instruments.
3. Lower tax liability: If the employee has been unemployed for more than two months, then the withdrawal is not taxed. If the employee has been unemployed for less than two months, then only the interest earned on the EPF balance is taxed.

Cons:

1. Lower retirement savings: Withdrawing the EPF balance means that the employee is losing out on the compound interest that would have accrued on the balance had it been continued until retirement. This means that the employee will have a lower retirement corpus.
2. Loss of benefits: By withdrawing the EPF balance, the employee loses out on the other benefits of the EPF scheme, such as employer contribution, interest earned, and tax benefits.
3. Difficulty in building a retirement corpus: If the employee withdraws their EPF balance every time they change jobs, they will find it difficult to build a sizeable retirement corpus, as they will not have a steady source of retirement savings.

Continuing with EPF balance:

Pros:

1. Higher retirement savings: Continuing with the EPF balance means that the employee will continue to earn compound interest on the balance, which will result in a higher retirement corpus.
2. Employer contribution: The employer will continue to contribute to the EPF account, which will result in higher retirement savings.
3. Tax benefits: Contributions to the EPF account are tax-deductible under Section 80C of the Income Tax Act, which reduces the employee’s tax liability.

Cons:

1. Lock-in period: The EPF scheme has a lock-in period of 5 years, during which the employee cannot withdraw the balance. This can be a disadvantage if the employee requires immediate liquidity.
2. No flexibility in investment options: The EPF scheme does not offer flexibility in investment options, as the contributions are invested only in debt instruments.
3. Low returns: The EPF scheme offers relatively low returns compared to other retirement savings schemes, such as the NPS.

Investing in the NPS:

Pros:

1. Flexibility in investment options: The NPS offers flexibility in investment options, as the contributions can be invested in various asset classes, including equities, debt, and government securities.
2. Higher returns: The NPS offers higher returns compared to the EPF scheme, especially if the contributions are invested in equities.
3. Tax benefits: Contributions to the NPS are tax-deductible under Section 80C of the Income Tax Act, which reduces the employee’s tax liability.

Cons:

1. Lock-in period: The NPS has a lock-in period until the age of 60, during which the employee cannot withdraw the balance. This can be a disadvantage if the employee requires immediate liquidity.
2. Uncertainty in returns: The returns on the NPS depend on the performance of the underlying assets, which can be volatile and uncertain.
3. No guarantee: The NPS does not offer any guarantee on returns, and the final corpus depends on the performance of the underlying

here’s an example:

Pros of withdrawing your EPF balance and investing in NPS:

• You get a lump sum amount that you can use to invest in NPS, which can help you build your retirement corpus faster.
• NPS offers higher returns than EPF, which can result in a larger retirement corpus.
• NPS offers the option to choose from various asset classes, which allows for greater flexibility in managing your retirement savings.
• NPS has the additional benefit of tax savings under Section 80C and 80CCD(1B) of the Income Tax Act.

Cons of withdrawing your EPF balance and investing in NPS:

• You lose the benefit of compounding interest on the withdrawn EPF balance, which could result in a smaller retirement corpus in the long run.
• NPS has a lock-in period until the age of 60, which means you cannot withdraw your funds before that. This can be a disadvantage if you need the funds for any emergency situation.
• NPS has a higher equity exposure, which could result in higher volatility and risk in your retirement portfolio.

Pros of continuing with your EPF balance:

• EPF is a safe and secure investment option with a fixed rate of return, which ensures that your retirement savings grow steadily over time.
• The interest on EPF is tax-free, which can result in significant tax savings over the long term.
• You can transfer your EPF account to your new employer, which ensures that your retirement savings remain consolidated and continue to grow.
• EPF has a lower equity exposure, which means lower volatility and risk in your retirement portfolio.

Cons of continuing with your EPF balance:

• The rate of return on EPF is lower than that of NPS, which could result in a smaller retirement corpus over the long term.
• EPF has a mandatory retirement age of 58, which means you cannot withdraw your funds before that. This can be a disadvantage if you need the funds for any emergency situation.
• EPF does not offer the flexibility to choose from various asset classes, which limits your ability to manage your retirement savings.

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