I want to transfer funds from my EPFO account to the NPS to improve returns. Is it possible to do so? If yes, how should I go about it and to what extent? What will be the tax incidence in such a case? Is it advisable to do so as I have 10 years of service left?
Prableen Bajpai Founder, FinFix Research and Analytics: Yes, it is possible to transfer funds from the EPFO to the NPS. A one-time transfer of the EPF corpus to an NPS Tier 1 account is tax-exempt under Section 10(12) as the transferred amount is not considered a contribution to the NPS. At the same time, it cannot be treated as a contribution by employee/employer in that year for tax deduction. As a prerequisite, you need to have an active NPS Tier 1 account and it can be done via your employer. Alternatively, you can do it through a POP (point of presence) or eNPS portal. To transfer, you must submit a transfer request to the recognised EPF through your current employer. Whether such a shift should be made will depend on your financial situation and goals. Also consider the following factors: ? If you have equity investments (stocks, equity mutual funds) in addition to the EPF, retain your EPF investment. It will provide better access to funds when you retire. You can increase the allocation to equity products based on your retirement goal. ? If you don’t have any exposure to equity, consider moving to the NPS. However, if you choose the ‘auto’ option, your equity allocation will only be around 20% (assuming age as 50 years) and decline with age (by 60, it will be 10-15% in moderate and aggressive options), thus defeating the purpose of switching to equity. If you choose the ‘active’ option, equity allocation can go up to 75% till 50 years (reduce to 50% by 60 years). ? The third aspect is the accessibility and taxation of funds at retirement. The interest on the NPS Tier 1 account is tax-exempt. At maturity, 60% of the corpus is tax-exempt under Section 10(12A). The remaining 40% is reinvested in an annuity plan though the income is taxed. The EPF provides more freedom in terms of accessibility to the corpus, which is tax-free. ? Some equity exposure is needed after retirement, so maintain a separate portfolio of equity mutual funds. The final decision should depend on your goals, asset allocation and liquidity needs.
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I am 40, with two children aged 10 years and one year. My equity portfolio is worth Rs 1.6 crore (Rs 50 lakh in mutual funds and Rs 1.1 crore in stocks), and I have Rs 25 lakh in the EPF. I hold Rs 80 lakh term insurance and Rs 30 lakh family health insurance through my employer. I have a Rs 50,000 monthly SIP in a small-cap ETF, and have monthly expenses of Rs 70,000. I aim to retire at 58. Can I achieve this with my current corpus?
Prableen Bajpai Founder, FinFix Research and Analytics: With 6% inflation, your monthly expenses, which are Rs 70,000 today, will rise to Rs 2 lakh by the time you turn 58. Assuming a 5% post-retirement return, a corpus of Rs 9 crore will be needed to manage expenses until the age of 90. While the calculated corpus caters to inflation with a base monthly expense of Rs 70,000, it does not incorporate any future lifestyle changes and other costs that could push this figure higher. Your EPF, mutual funds and stocks will generate a corpus of around Rs 17 crore, assuming 12% return for market-related products, if nothing is withdrawn. Since your child is 10 years old, you will need to allocate funds for her college education, and eventually for your younger child as well (college coinciding with retirement). The corpus required for them will depend on the country, college and course, among other factors. While you have a good buffer at present, do plan for these goals based on different cost scenarios and check for adequacy. Your current SIP is invested in a single small-cap ETF. Consider diversifying the SIPs across different market caps. Your insurance cover is sufficient for now. Do check how your health cover works if you leave the company or switch jobs. Schedule a review of your portfolio and goals at least once a year.
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