UPS vs NPS
The central government has come up with the 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 the employees working in the government sector will increase over time. However, no change has been made for the employees working in the private sector. In such a situation, how can the employees of the private sector get the same pension as UPS by using National Pension System (NPS) + Employees Provident Fund (EPF). Let’s try to understand through calculation.
Higher pension is possible in NPS than UPS
If you are starting a job in the private sector, where you get a basic salary of Rs 14,000 and an annual increment of 10%, you can get Rs 2.9 lakh as monthly pension by making regular contributions 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. Whereas, 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. For example, the maximum investment in equity in NPS for 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 return earned under this government scheme is very low, around 10%.
On the other hand, private sector employees who have opted for their employer’s 10% contribution to NPS 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 choose to invest up to 14% of their basic salary in NPS and get an income tax deduction for it. Higher contributions can help them build an even bigger retirement corpus.
You 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 term in government service, one can get at least half of one’s salary as regular income during retirement. For private sector employees, getting a decent amount on a regular basis is not a very difficult goal.
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 larger 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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