National Pension Scheme (NPS) and the Employment Provident Fund (EPF) are investment tools. These schemes are retirement-oriented that enable the applicants to save for their future. These are the most popular plans in the Indian market today. But many times, investors may find themselves in turmoil. As both these schemes have their pros and cons selecting the right scheme for oneself becomes difficult.
The National Pension Scheme is a voluntary pension scheme similar to mutual funds. On the other hand, the Employment Provident Fund is restricted only to employers to ensure their security during the post-retirement financial needs. Through this article, I would like to introduce both the scheme to the readers. Thus, I’ll highlight the key differences between the two schemes first. So, let’s get started.
Difference Between NPS and EPF
These two schemes are specially designed to assist the employees during the blue days. The corpus generated over their productive days can enable them to lead a content life post-retirement. The individuals under the EPF scheme are also allowed to change their scheme to NPS to avail of several tax benefits and savings.
The choice of selecting the right investment scheme depends on the investors. This depends on various factors associated with the investor, such as risk appetite, liquidity needs, expected returns, etc. As both the schemes have contrasting structures investment in each scheme has its own merits and demerits. Let us look at some of the differences between the two schemes.
1. Types Of Account
NPS: this scheme has two accounts. Tier I and Tier II. The investment in the tier I account is mandatory for every investor. However, investment in tier II is optional.
EPF: there is only one account under this scheme. But the contributions are made by the employee and the employer in the same account.
2. Ease Of Access
NPS: to facilitate the login to the account details, the NPS has a PRAN (Permanent Retirement Account Number). This is a unique 12-digit code generated for every registered individual. The PRAN, along with the passwords, acts as an authentic credential that enables its registered users to login.
EPF: this scheme generated a UAN (Universal Account Number). It is also a 12-digit code that enables its users to log in to the system and access their account details.
3. Nature Of Contribution
NPS: the investment in this scheme is not mandatory for every employee. It is voluntary.
EPF: this scheme is adopted by every organization with more than 20 employees. Thus, it is mandatory to contribute towards this scheme if the monthly income of the employee is less then Rs.15,000 and it is voluntary for the others.
4. Minimum Investment
NPS: the minimum limit for investing in tier I account is Rs.500 and for tier II account is Rs.1,000 every month. There is no maximum limit set.
EPF: Rs.250 per month.
NPS: The returns, in this case, change depending on the market condition in the respective financial year. The average rate of returns for NPS ranges between 8.0% to 8.7%.
EPF: the average rate of returns for EPF ranges between 8.0% to 8.5% per annum.
6. Matured Sum
NPS: after the account holder turns 60 years old, the matured sum can be withdrawn by him. The account holder can only withdraw 60% of the mature sum. The remaining 40% is used to buy an annuity with a life insurance company.
EPF: after the account holder turns 58 years old, he can withdraw the entire corpus accumulated over the years.
7. Partial Withdrawal
NPS: partial withdrawal of up to 25% of the invested amount is allowed only after the completion of 3 years of the account.
- The partial withdrawal is allowed on in case of emergencies and genuine situations.
- For medical treatments, 6 times the salary of the account holder can be withdrawn
- For repayment of home loan, 36 times the salary of the account holder can be withdrawn.
- For purchasing a plot of land 24 times the salary of the account holder can be withdrawn.
- For renovation or repair of the house, 12 times the salary of the account holder can be withdrawn.
- For marriage or education up to 50% of the contribution can be withdrawn.
8. Tax Benefits
NPS: during the withdrawal post-retirement 60% of the sum is tax-free.
EPF: the corpus accumulated and the interest accrued is exempted from taxes.
9. Tax Deductions
- The invested amount other than the annuities are taxed.
- Tax deduction can be obtained under section 80C, 80CCD (1B), 80CCD (2) on the invested amount.
- The interest earned on the returns is exempted from tax.
- After maturity 60% of the amount to be withdrawn is tax-free.
- Under Section 80C the contributions towards this scheme are tax-free.
- The interest earned and the withdrawals are also not taxed.
- Apart from tax deductions under Section 80C there are no additions benefits to the applicants of this scheme.
10. Risk Involved
NPS: the NPS returns are directly linked to the conditions in the market. Thus, they are subjected to risks.
EPF: is backed by the government thus it is much safer than NPS.
11. Investment Of Contribution
- The investment choices for NPS are active and auto investment mode.
- The investors who have made the active can invest up to 50% in the equities. The remaining may be invested in medium or low return instruments.
- As per the auto choice the asset allocation is calculated based on the age of the contributor.
- The investors from the government sector can only contribute 15% towards equity.
- The investment in this scheme is made in Central and State government securities.
- The pension earned is independent of the market conditions.
12. Asset Allocation
NPS: the applicants have a choice to choose the fund managers and the asset classes. This includes equity, corporate debt, government security, and alternative assets. A large corpus can be generated by the investors of NPS as this scheme offers the flexibility to expose to equity.
EPF: under the EPF the EPFO only invests in debt securities. This has gained the momentum in exposure to equities quite recently.
1. Can NRIs open an NPS account?
Yes, NRIs can avail of the retirement benefits through the NPS scheme. However, they should reside in India till the maturity of the account.
2. Which banks serve as the Pop for the NPS scheme?
The list of official PoP can be checked from the NPS’s official website.
3. Can an individual make more than one NPS accounts?
No, the PRAN is uniquely generated for every account holder. Thus, multiple accounts cannot be generated for a single person.
4. Define Permanent Retirement Account Number (PRAN).
The Permanent Retirement Account Number is a 12-digit number. This is a unique number issued to every subscriber of the NPS account.
5. What are tier I and tier II accounts?
These are the two accounts under the NPS. The tier I account is a mandatory account. The invested amount cannot be withdrawn from this account until the applicant has reached his retirement age. The Tier II account is optional. The investments can be withdrawn by the account holder at any time.
6. What happens if the minimum investment is not fulfilled in the NPS account?
If the applicant fails to contribute the minimum requirement then the account will be frozen. The account holder will have to pay the minimum contribution and a penalty charged by the PoP to unfreeze the account.
7. Does the government also contribute to the NPS account of the employees?
No, the government does not contribute to the NPS account of the employees.
8. Can the account holder change the investment choice?
Yes, the investment choice made by the account holder can be changed only once a financial year.
9. How to divide the NPS funds between the asset classes?
The division of the NPS funds depends on the risk appetite of the applicant. An applicant can select an NPS lifecycle fund. The asset allocation will be automatically set as per the age of the applicant.
10. Is the nomination facility available for NPS?
Yes, nomination facility is available and the applicants can declare the nominees for their funds at the time of registration or anytime later.
11. What will happen to the funds if the account holder dies before the age of 60?
In case the account holder dies before the age of 60, then his funds can be claimed by the nominees. If the account holder did not nominate any nominees, then his funds will go to the legal heirs.
12. Can the NPS funds be withdrawn if the applicant loses his job?
No, the entire amount cannot be withdrawn by the account holder. However, partial withdrawal of 25% of the contributed amount is allowed.
13. What is the interest rate of NPS?
The interest rate of NPS is not fixed; it ranges between 12% to 14%.
14. What is the motive behind the purchasing of annuities from 40% of the accumulated pension funds?
This is done to ensure that the government employees will obtain a regular and stable income post-retirement.
15. Who calculates the interest rate of NPS?
The Pension Accounting Office calculated the interest rates associated with NPS.
16. What are dormant EPF accounts?
These are accounts that have not been into operation for the past 30-60 months.
17. How to activate dormant EPF accounts?
An account can become dormant when the account holder has not transferred the old account to the new employer and has forgotten about it. This account can be turned active again by transferring the amount to the new EPF account or by withdrawing the amount using the UAN number.
18. If an individual has withdrawn a part of the EPF corpus then is he entitled to get interest on the withdrawn amount as well?
No, interest will not be generated on the withdrawn amount. But the remaining amount in the account will continue to generate interest.
19. If an individual has changed his job then will he get a new UAN?
No, the UAN is a unique identification code allocated to every individual that remains the same throughout.
20. If an individual has changed his job then should he withdraw the EPF corpus or transfer it to a new account?
The transfer of the EPF corpus is highly recommended. This will prevent the burden of taxes that are charged due to premature withdrawal.
21. Are the contributions from the employee and the employer to the EPF account exempted from tax?
Yes, the contributions made to the EPF account are exempted from tax. The employer’s contribution is tax-exempt at the source. However, the employee’s contribution is taxed. But under the Income Tax Act, they can avail of several tax benefits. This includes a deduction of Rs.1.5 lakh under Section 80C.
22. Form 15G/H should also be submitted while filling the EPF withdrawal form?
Form 15G/H enables the account holders to deduct the TDS during withdrawal. The tax is charged on when withdrawals are made before 5 years. Thus, if the individual wishes to reduce the TDS charged then Form 15G/H should also be submitted along with the withdrawal form.
23. What is the taxable amount if the EPF account is withdrawn before 5 years of service?
If the individual withdraws the EPF account before 5 years of service then he is liable to pay 10% of TDS. If the amount withdrawn is less than Rs.50,000 then it is exempted from tax. If PAN is not provided at the time of registration, then the taxed amount increases to 30%.
24. Does the employer have the privilege to reduce his share of contribution towards the EPF account of his employees?
No, the employers are not supposed to modify their contributions towards the employees’ EPF account. This is considered as a criminal offense.
25. If the employer is paid on daily basis or partly then how is his contribution towards the EPF account calculated?
The amount to be contributed is calculated at the end of every month. So, the daily income of the employee will to summed to calculate his contribution towards the EPF account.
26. If the resigns or quits his job then does, he has to contribute to the EPF account?
No, the employee does not have to contribute to the EPF account until he gets a new job.
27. Can the employee avail of the EPF on his own?
No, any employee can not avail of the EPF account. He should work in an organization under EPF & MF Act, 1952.
The choice of selecting the right investment option lies with the investor. Every investor has different aspirations and risk-taking abilities. As employees, we have to make our own decision to invest in either NPS or EPF or both. The government backs EPF therefore, they are considered safer.
But a risk-taker would invest in NPS as it brings in more returns. As the exposure to the equities is more in NPS the returns are also high. However, the only drawback is 40% of the invested amount will be used to buy annuities post-withdrawal of 60%.
These annuities are used to generate pension income for retirees. Some companies may have an EPF policy thus the employees with an income of less than 15,000 have to contribute 12% of their salary. The corpus generated can be withdrawn by the employee at the time of his retirement.
Here the entire invested amount along with interest earned, is withdrawn at the same time. These employees also have a choice to invest in the NPS. There is no restriction on investing in both schemes. Thus, the investors can consider investing in both the schemes for more monetary returns and a tranquil life post-retirement.