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EPF and NPS: Everything you Need to Know

dateKnowledge Centre Team dateNovember 02, 2022 views101 Views
EPF and NPS Account

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.

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 Ter 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.

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

Liquidity and Withdrawals Options in EPF and NPS

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

Full Withdrawal

Normally, 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 Rs 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 age 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.

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 Rs 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 contribution through the employer of up to INR 150,000 is 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 Rs 1.5 lakhs under section 80C.

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

Proposed Changes in the Budget 2021

The Finance Bill 2021 proposed that an employee’s contribution to Provident Fund that exceeds the INR 250,000 threshold would generate taxable returns. This decision would majorly impact higher-earning employees.

So, if your EPF savings are being affected by this change, you may want to include other plans in your retirement portfolio. NPS and ULIPs are two of the best contenders for the role. Both plans offer diversified portfolios which you can manage in automatic mode.

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

Frequently Asked Questions on EPF and NPS

Yes, you can have both EPF and NPS. Both plans offer different modes of investment returns. While EPF is a safe investment with fixed returns, NPS offers market-linked growth for long-term investors. So, if you are in your 30s or early 40s NPS may offer a better value for time.

Although EPF is an excellent avenue of retirement planning, you need to ensure adequate contribution to safeguard your retirement. EPF offers a fixed rate of interest of about 8% p.a. Thus, you need to maintain a regular contribution of a minimum of 15% of your annual income to EPF for a financially safe retired life.

Yes, the NPS is a great retirement saving plan for private sector employees. The investment gives you ample opportunities to build a corpus for a steady pension after retirement. NPS gives you the freedom to contribute as per your income and avail of higher tax savings. You can also involve your employer to contribute to your NPS account.


Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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