Difference Between EPF & National Pension Scheme

What is EPF?

EPF is a compulsory contribution all employees have to make if they work in an organization that comprises of over 20 employees. 12% of an individual’s basic salary goes into his EPS scheme, While the employer will contribute 3.67% into that same scheme.

What is NPS?

National Pension Scheme is a voluntary and defined retirement savings scheme designed to allow systematic savings during the subscriber’s employment life.

 

Difference between Employee Provident Fund and National Pension Scheme.

 

The basic and most important difference between EPF and NPS is that in EPF you are assured tax-free returns in the form of annual interest, while the NPS, gives market linked returns where a maximum of 50% of the contributions can be allocated to equity markets. In turn, increasing the possibility of earning higher returns provided the investment is made for a 10-year term or more.

 

The Pension Fund Regulator, released a process to transfer funds from your EPF to NPS. the Finance Minister allows a one-time tax-free withdrawal from EPF and superannuation fund to be transferred to NPS. This amount will not be considered as income of that year and hence will not be taxed. The employee will therefore not be able to claim tax benefit on the transferred amount to NPS.

 

Although there is a provision to transfer your funds from an EPF to and NPS, let’s look at the difference between the two to help you make an informed decision.

  • Income tax benefits:

 

EPF – All contributions made towards EPF are tax-free under section 80C, Interest earned and withdrawals are non-taxable.

NPS – All funds except those invested in annuities are taxable at the prevailing market rates. Contributions of up to Rs.2,00,000 are deductible from taxation under Section 80C and Section 80CCD. Other investments and savings like LIC Premiums, ELSS, post office savings etc. will have to share the Rs.1,50,000 provision under Section 80C and Section 80CCD. An additional amount of 50,000 can be claimed as a separate deduction under Section 80CCD

  • Terms of Eligibility:

EPF – If you are a salaried individual in n a private sector organization, it is compulsory contribute to EPF.

NPS – All government employees who joined after April 2004 are obligated to contribute to this scheme. Unlike EPF, the general public can also choose to open an NPS account and a private sector employee can choose to transfer his funds from his EPF scheme to the NPS scheme.

 

  • Withdrawals:

EPF – Can be withdrawn after attaining the age of 58, However, EPF withdrawals before retirement is allowed under certain circumstances, such as medical treatment, repayment of a house loan, purchase of a site or plot of land, repair and remodel a home or for marriage or education.

NPS – NPS withdrawals are not allowed until the contributor attains the age of 60. Partial withdrawal is allowed if an individual invests 80% of the NPS wealth in an annuity scheme. 40%  of the withdrawal made after 60 must be invested in an annuity.

  • Return Rates

EPF – The average rate of returns on EPF is between 8.00% – 8.50% p.a.

NPS – Returns on the national Pension scheme depend on the market conditions for stocks and bonds, the ratio of investment options and exposure to equity, medium fixed income securities and low fixed income securities. Investors in NPS may expect a slightly higher return due to allocation to equity. Over a long tenure of 10 years or over, returns generated by NPS may be 2 to 3  percent higher than those generated by EPF.

  • Investments:

EPF – EPF contributions are invested in Central Government securities, State Government securities, bonds and deposits of PSUs. Pension of the contributor is independent of market conditions.

NPS: An individual can choose to invest his NPS contribution in an active choice mode where investors will get up to 50% exposure to equity, with the remaining 50% invested in medium or low return fixed income instruments. Auto choice mode calculates asset allocation based on the age of the contributor.NPS contributions from government employees in the Tier 1 account get only 15% exposure to equity.

 

Now that we have laid out the difference between Employee pension scheme and National Pension scheme, you can now choose where you would like to invest your contribution while keeping in mind the point listed above.