All the employees covered under the EPF scheme now have the option to switch to NPS scheme in order to use a number of tax benefits and savings that are applicable under NPS. It is best to compare and analyse the different features of the two options.
Employees that are currently covered under the EPF scheme have the option to shift to the NPS scheme and make use of the attractive tax benefits and savings that apply under NPS.
Introduction
Employee Provident Fund (EPF) and National Pension Scheme (NPS) are essential retirement savings tools for employees that help them build a tax-efficient retirement corpus. These two schemes focus on one objective of creating a corpus for the employees but differ on four parameters: flexibility, risk, returns, and tax. If an employee plans smartly with either or a combination of both, he can retire with a handsome corpus. This choice of NPS v. EPS or both depends on Age and Salary
EPF v. NPS
EPF is a scheme run by the Employee’s Provident Fund Organization (EPFO) to provide employees with social security and retirement benefits. Employers must register with the EPFO and make an EPF contribution if they employ a workforce of 20 or more whose monthly salary is up to Rs. 15,000. Nonetheless, an employer can voluntarily contribute to the EPF regardless of his obligations due to the non-fulfilment of these conditions. When an employer or employee chooses to contribute to the EPF scheme, 12% of the basic salary (plus dearness allowance) is deducted from an employee’s monthly salary and credited to his PF account. The employer also matches the similar contribution, paid out of his coffers, in the employee’s PF and pension account in the proportion of 3.67% and 8.33%, respectively. The employer has to allocate an additional 0.50% of the employee’s salary to the Employee’s Deposit Linked Insurance Scheme (EDLI) and 0.50% towards the administrative charges. Where the employee’s salary exceeds Rs. 15,000 per month, the employer’s contribution to the pension account is limited to 8.33% of a Rs. 15,000 salary. Therefore, only 8.33% of Rs. 15,000 is contributed to the pension account, while any additional contribution goes into the PF account.
NPS is also a voluntary retirement savings scheme administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Unlike EPS, any Indian citizen, employee or self-employed, can join NPS individually or as part of an employee-employer group. The NPS provides flexibility in choosing investments in equity, government bonds or corporate debentures. It also allows subscribers to choose Pension Fund Managers (PFMs) to manage their investments. Subscribers can switch between investment options and fund managers and choose the investment composition from Active or Auto. NPS provides two types of accounts to the subscribers – Tier I and Tier II. Tier I is a mandatory retirement account, whereas Tier II is a voluntary savings account. Unlike Tier I account, Tier II offers greater flexibility in terms of withdrawal. There is no maximum limit on the amount one can invest in Tier I of the National Pension System (NPS) each year. However, a minimum of Rs. 1,000 must be invested every year.
Partial Withdrawal
The EPF allows employees to withdraw partially during service for specified purposes. Partial withdrawal is allowed after five years for purchasing or repairing a house, seven years for marriage or education, and ten years for paying an existing debt. However, there is no lock-in period for withdrawals in case of medical emergencies or for disabilities.
Under the National Pension System (NPS), subscribers must have a mandatory subscription period of 3 years for partial withdrawal only for specified purposes of higher education, marriage, home purchase, specified illnesses, and medical expenses due to disability.
EPF members can make partial withdrawals within the limits set by EPFO for each specific purpose, while NPS subscribers can withdraw up to 25% of their NPS contribution at the point of such withdrawal. In NPS, subscribers are allowed a maximum of three partial withdrawals throughout the tenure. In contrast, the number of withdrawals in EPF varies depending on the purpose of the withdrawal.
Maturity and Pre-Maturity Exit
EPFO allows members to withdraw total funds from the EPF account in the event of superannuation or death. Further, a member can withdraw his entire contribution (including interest) if he has been unemployed for at least two months. However, the contribution to the EPS cannot be withdrawn as it is converted into an annuity to pay a monthly pension.
When a subscriber exits from the NPS upon attaining the age of 60 or on superannuation, a complete lump sum withdrawal is allowed if the corpus is up to Rs. 5 lakhs. If the corpus is more than Rs. 5 lakhs, 40% is invested in the annuity to pay the monthly pension, and the remaining 60% is paid as a lump sum. When a subscriber opts for the pre-mature exit from NPS, the withdrawal limit depends on the corpus size. A complete lump sum withdrawal is allowed if the corpus is up to Rs. 2.5 lakhs. If the corpus is more than Rs. 2.5 lakhs, 80% of the corpus is invested in the annuity to pay the monthly pension, and the remaining 20% is paid as a lump sum. For pre-mature exit, a subscriber (with no employee-employer relationship) must have completed a five-year mandatory subscription period of 5 years.
EPF vs NPS
Rate of returns:
2012 – 2013: 9.76% 2013 – 2014: 5.37% 2014 – December 2015: 19.63% From the launch of the NPS scheme: 10.35% | Rate of returns:
|
Liquidity and withdrawals:
| Liquidity and withdrawals:
|
Income Tax benefits and deductions:
| Income Tax benefits and deductions:
|
Investment of contributions:
| Investment of contributions:
|
FAQs
What is the Employees' Provident Fund (EPF)?
EPF is a mandatory retirement savings scheme for salaried employees in India, regulated by the Employees’ Provident Fund Organisation (EPFO). It ensures that employees save a portion of their salary for future needs.
What is the National Pension System (NPS)?
NPS is a voluntary retirement savings scheme in India aimed at providing retirement benefits to all citizens. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).