EPF and NPS: Everything You Need to Know

2023-11-02

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In India, most salaried individuals have access to two broad retirement-specific instruments: The Employment Provident Fund (EPF) and the National Pension Scheme (NPS). The latter is an employee benefits scheme and only applies to salaried people. However, any individual in any profession or work structure can use NPS to save for retirement.

Key Takeaways

EPF is a mandatory saving scheme for salary-drawing employees with equal employer and employee contribution.
NPS is an optional pension scheme providing diverse investment choices and return-linked returns.
Both EPF and NPS provide tax relief under Section 80C of the Income Tax Act.
EPF allows conditional partial withdrawals; NPS permits limited withdrawals after a set period.
EPF ensures fixed returns; NPS aims for a larger corpus through equity and debt investments.

Contribution – EPF and NPS

National Pension Scheme and the Employee’s Provident Fund are the two most common investment options for people. They provide the dual advantage of tax savings and good returns.

Contribution to National Pension Scheme

The Indian government introduced the National Pension Scheme in 2004. It is a voluntary scheme applicable to Indian nationals and Overseas Citizens of Indian Cardholders.

The minimum contribution for NPS is INR 500 for Tier I accounts and INR 1000 for Tier II accounts.
NPS offers a choice of equity, corporate debt, and government bonds depending on the investor’s risk preference.
You can become a member of NPS through your employer or as an independent participant.

Contributions to Employment Provident Fund

The Indian Government introduced the Employment Provident Fund in 1951. All establishments with more than 20 employees are mandated to be a member of EPF.

Contribution is mandatory for employees with a basic salary of less than INR 15,000 per month.
Employees with a basic salary of more than INR 15,000 can also choose to contribute to EPF.
The minimum EPF contribution stands at 12% of salary, that is, the aggregate basic salary, dearness allowance, retaining allowance, and cash value of food concessions.
You can restrict your EPF contributions to INR 1800 per month at your choice as an employee.
You can also contribute 100% of your basic salary as a voluntary contribution to EPF.

Did You Know?

PPF account holders can access a loan after 1 year, up to 25% of the balance 2 years prior, but only before the 5th year ends.

Source: ClearTax

Rate of Return on EPF and NPS

The returns under Employment Provident Fund are guaranteed and fixed. The Indian government announces the interest rate annually, but we can observe a general trend of declining rates over the years. On the other hand, the return on National Pension Scheme varies and relies on the equity allocation magnitude.

In other words, the higher the equity, the greater the returns and higher the risks. Therefore, EPF offers assured but lower returns, whereas NPS promises high returns with more significant risks.

It is essential to remember that the average rate of return for EPF ranges from 8% to 8.50% per annum. On the other hand, the average return rate for NPS has fluctuated over the years:

9.76% from 2012 to 2013
5.37% in 2013-2014
19.63% from 2014 to 2015
10.35% from the launch of the NPS scheme

You should note that NPS returns are not guaranteed, unlike EPF. NPS returns depend on the following factors:

Equity and bond market movements

Fund performance

Your overall fund allocation or choice of portfolio

Difference between EPF and NPS

	EPF	NPS
Returns	Guaranteed but fluctuating returns: The return rate is less vis-s-vis NPS	Variable returns: Higher the equity allocation, the better the long-term returns, but with a higher risk
Flexibility	You cannot how your money gets invested	Allows contributors the choice to invest across four different asset classes: equity, corporate debt, G-Sec, and alternative assets
Withdrawals	Withdrawals are allowed under specific circumstances.	Funds cannot be withdrawn until the contributor is 60 years of age
Tax Benefits	Employee contribution of up to INR 150,000 gets tax benefits	Self-contribution of up to INR 1.5 Lakh + additional contribution of Rs 50,000 is tax deductible

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Liquidity and Withdrawals Options in EPF and NPS

Another difference between NPS and EPF pertains to liquidity and withdrawal options.

Full Withdrawal: Normally, the National Pension Scheme and EPF both do not permit full withdrawal of funds until you reach 60 years of age. The following differences are there in the full withdrawal rules of EPF and NPS:

Withdrawing from EPF:
You can withdraw 75% of your EPF corpus if you have not reached the age of 55 but have remained jobless for more than a month. The remaining must be transferred to the new employer
You can withdraw 90% of the corpus one year before retirement but after the age of 54
Withdrawing from NPS:
If your total accumulated corpus is less than ₹5 lakhs at the time of retirement (60 years of age), you can withdraw 100% of the corpus
Before reaching the retirement age, you can withdraw 100% of the corpus if the total accumulation is less than 2.5 lakhs

Partial Withdrawals: Both NPS and EPF allow partial withdrawal of funds under emergencies, such as:

Medical emergencies
First home purchase
Child’s marriage or education

Under the EPF scheme, you can withdraw up to 6 times your salary for medical treatment and 36 times the member’s salary for home loan repayment.

EPF also allows you to withdraw up to 24% of your salary for purchasing land and up to 12% for home remodelling or repair. In addition, under EPF, you can withdraw 50% of your contributions for marriage and education up to three times within your term.

Withdrawals at Retirement: Withdrawal from EPF and NPS at the time of retirement varies to some degree. The following conditions explain the difference between EPF and NPS rules for retirement withdrawals:

If withdrawing before the age of 60, you must invest 80% of the NPS wealth in an annuity scheme. Only 20% of the fund value is available for lump sum withdrawal.
When you withdraw at 60 or later from National Pension Scheme, you only need to invest 40% of the corpus in an annuity. Rest you can have as a lump sum.
You can withdraw 100% of your EPF balance at retirement any time after the age of 55.

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Tax Benefits

Direct Tax Benefits – NPS and EPF

Employment Provident Fund Tax Benefits:

All EPF contributions are tax-free, and the interest earned and withdrawals are not taxed. Your contribution to EPF allows you a tax deduction of up to ₹1.5 lakhs under section 80C.

However, under the Simplified Tax Regime, no deductions are available.

National Pension Scheme Direct Tax Benefits:

As per the Regular Tax Regime, employee contributions through the employer of up to INR 150,000 are available as a deduction from total income.

In addition, contributions of up to INR 50,000 are deductible from tax under Section 80 CCD(1B). This is over the limit of ₹1.5 lakhs under section 80C.

Thus, you can avail of a total deduction of ₹2 lakhs if you invest in NPS for your retirement.

Proposed Changes in the Budget 2024

On February 1, 2024, an NPS member who has completed three years of contributions may take money out of his pension account. Remember that there is a withdrawal limit.

The Employees' Provident Fund Organisation (EPFO) has loosened several requirements as of May 2024 to facilitate the lives of Employees' Provident Fund (EPF) members. The modifications include faster death claims, multi-location claim settlement, and an expanded auto-settlement facility.

Summing Up

With the two retirement savings options available in the market, investors can compare the benefits and drawbacks of EPF and NPS before making a decision. An investor can even open an NPS account alongside the EPF investments.

Understanding EPF vs NPS, EPF is a suitable choice for those seeking stability and guaranteed returns, as it offers a fixed interest rate set by the government (currently 8.1% per annum). EPF contributions are tax-exempt under the EEE (Exempt-Exempt-Exempt) regime, making it a tax-efficient option. However, EPF has a limited equity exposure (up to 15%) and does not provide flexibility in asset allocation. On the other hand, NPS offers market-linked returns with the flexibility to choose equity exposure up to 75%. It provides additional tax benefits under Section 80CCD(1B) up to ₹50,000. However, NPS returns are subject to market risks, and 40% of the maturity corpus must be invested in a taxable annuity.

Ultimately, the choice between EPF and NPS depends on an individual's risk appetite, investment horizon, and tax planning preferences. A balanced approach of investing in both EPF and NPS can help create a diversified retirement portfolio.

Glossary:

Diversified retirement portfolio: A diversified retirement portfolio is a collection of investments that spreads your money across different asset classes, sectors, and regions to reduce risk.
Dearness Allowance: Dearness Allowance is the sum that the government provides to its workers as part of the expense of living.
Equity allocation: The distribution of a company's ownership positions among its investors, employees, and founders is known as equity allocation.
Annuity: A fixed sum paid regularly, usually for retirement income.
PFRDA: Regulates and governs the National Pension System of India.

Frequently Asked Questions on EPF and NPS

NPS distributes the total investment among a variety of securities, including stocks, corporate debt, and government bonds. In contrast, EPF has a restricted limitation on the amount of equity it may allocate and mostly concentrates on debt investments. Section 80C allows for income tax deductions of up to ₹1.5 lakh for interest and contributions made into an EPF account.

EPF is better suited for those seeking stability and guaranteed returns, while NPS offers higher growth potential through market-linked returns but with higher risk. EPF provides a fixed interest rate of 8-8.5%, allows partial withdrawals for specific purposes, and is tax-free on retirement after five years. NPS offers flexible equity exposure up to 75%, with tax benefits on contributions and 60% of the corpus tax-free at exit, but has mandatory annuitisation of 40% of the corpus. The choice depends on one's risk appetite, desired returns, and tax planning preferences, with experts recommending a balanced approach by investing in both schemes.

Under Section 80CCD (1) and Section 80CCD (2) of the Income Tax Act, NPS offers a total tax advantage of up to ₹2 lakh, while EPF allows a tax deduction of up to ₹1.5 lakh.

NPS offers subscribers the choice to invest in different asset classes, including equity, corporate bonds, government securities, and alternative investment funds, with the ability to actively manage their portfolio or opt for an auto-choice option based on their risk profile. In contrast, EPF contributions are primarily invested in government securities, bonds, and deposits of public sector undertakings, providing a fixed, guaranteed rate of return set annually by the government.

A lot of investors wonder, can I have both EPF and NPS. It is possible for employees in the private sector to open an NPS account in addition to their EPF account.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.