Sunday, 19 February 2017

What is the Difference Between EPF and NPS: Comparison

EPF stands for the Employee Provident Fund and NPS is National Pension Scheme. The existing EPF subscribers have an option to switch to NPS without paying any taxes in the current financial year as per this year's budget. For such subscribers who do this switch would be given a one time chance to switch back to EPF.

However, on rejoining EPF, the subscribers would be treated as a new entrants and would not be eligible for benefits he might have accumulated in his previous EPF tenure. And now, once he returned back to EPF  he would not have any chance to join back NPS. So the question is,


Should existing EPF members switch to NPS? (or) Is NPS really a good option for new government employees for whom NPS is compulsory? (or) Should you at all invest into NPS through the section 80CCD1B which is exclusively for NPS investments?

So let us compare EPF and NPS in detail and find out,

So who can open these accounts?

EPF: In case of EPF, only salaried employees can open an EPF account. Employers with more than 20 employees have to provide provident fund to the employees.

NPS: In case of NPS, every Indian resident who is between the age of 18-60 years can open an NPS account. Even NRI's who are KYC complaint can open NPS account.

Let us see what are the contributions you need to make to these accounts,

EPF: In this 12% of your basic and DA is contributed each by the employee as well as by the employer. But where the basic and DA is more than 15,000 rupees, 12% of 15,000 rupees is contributed each by the employee as well as the employer to your EPF account. Out of the 12% of the employer contribution 8.33% is contributed to the Employee pension scheme and 3.67% is contributed to the EPF account. You can contribute more than 12% your PF account if you wish so, but it is not compulsory for your employer to match this additional contribution. For the first time employees joining on or after the first of September 2014, they cannot be a part of the employee pension scheme and so the entire 12% of the employer contribution goes into the EPF account. EPF is compulsory for employees earning less than or equal to 15,000 rupees as their basic and DA and other once on in more, EPF is voluntary.

NPS: It is compulsory for central and for some state government employees who ever joined after the first of January 2004 and these government employees have to contribute 10% of their basic and DA to the NPS account where the government matches their contribution. More and more employers are becoming a part of NPS as the employer contribution is completely tax exempt. This contribution in case of EPF is kept at 1.5 lakh rupees per person, but there is no such limit in case of NPS. For NPS subscribers for whom NPS is not compulsory the minimum contribution is 6,000 rupees each year and there is no defined frequency of contribution in this case, but where NPS is compulsory and also in case of EPF the frequency of contribution is monthly.

Let us now compare these two options on the basis of type of underlying investments.

EPF: As you know it gives a fixed return and invest in government and corporate deposits, gilts etc.

NPS: Where as NPS returns a market linked as NPS invests into equity, corporate debt and government securities. It have two choices, one is auto choice and the other one is active choice. In case of auto choice, the proportion of equity investments is changed based upon your age and in case of active choice you have the option to choose your own allocation. If you want to know more detail about these two choices, please read the article National Pension Scheme. So you see because of  its equity investment NPS have the potential to give you better returns.

Let us compare the returns now,

EPF: In case of EPF, government announced a fixed interest to be paid out each year and currently it is 8.75%.

NPS: At NPS, if we consider maximum equity allocation, then equity would be 50% and debt would be 50%. So in the long run it would give returns the same as balanced funds. It usually gives returns of about 10% on an annual basis. Currently you might see high returns in case of NPS, which is because of the reason tally in the bond market. But this may not be a true indicator of NPS returns. So considering them as power balanced once would be a better idea.


Let us look at the taxation parts now,

EPF: The investment done by the employee on both EPF and NPS both are tax deductible under the overall limit of the section 80 C. EPF has an EEE status, that is the investment made the returns on an the withdrawal a completely tax exempted. Except in the case where you withdraw your funds within 5 years of enrollment into EPF and this withdrawal is taxed according to your tax slab. EPF funds can be completely withdrawn once you turn 58 years old and the final corpus is completely tax free.

NPS: In case of NPS, an additional section that is 80CCD1B which is explicitly for NPS investments is available where you can claim the tax reduction for 50,000 rupees of investments each year. Not to forget, this is often in above the tax exemptions you can claim under the overall limit of the section 80 C for the NPS investments. NPS has an EET status that is the investment is tax exempted, the returns are tax exempted, but the withdrawal is partially taxed. Out of the final corpus that you get to retirement, 40% has to be compulsorily utilized to buy annuities, 40% is tax free, you can withdraw additional 20% of the corpus by paying taxes, according to your tax slab and in case you don't want to pay any taxes you may invest 60% of the corpus to buy annuities. Annuities give low returns and income from annuities is taxed according to your tax slab.

Let us check the withdrawals now,

EPF: You can completely withdraw your EPF funds, if you remain unemployed for more than two months or for treatment of life threatening diseases of self, spouse, dependent children or parents. EPF funds can also be withdrawn for construction or for purchase a plot. This can be done only once in your EPF tenure. You can also withdraw for marriage of self, siblings and children, repaying your home loan, etc. All given withdrawal options are subject to various limits and conditions.

NPS: In this type, you have to be an active NPS member of the NPS scheme for at least 10 years. Subject to this condition, you can withdraw 25% of the contribution that you have made 3 times in your NPS tenure with the gap of five years between two withdrawals. Now these withdrawals could be made for education, marriage or construction of new house, etc. This gap of 5 years is not valid in case of critical illnesses.