What is EPF?
The EPF or Employees Provident Fund is a retirement plan backed by the government of India and managed by a statutory body called the EPFO (Employee Provident Fund Organization). The Employees' Provident Fund came into existence with the promulgation of the Employees' Provident Funds Ordinance on the 15th November, 1951 which was replaced by the Employees' Provident Funds Act, 1952.
Let's understand what is the EPF:
- Salaried employees who earn basic pay up to ₹15,000/month have to contribute towards EPF mandatorily.
- Under this retirement scheme, both the employee and the employer contribute a fixed amount towards the employee's retirement pool.
- The employer and the employee contribute 12%.
- Interest is accrued on the joint investment.
- Upon retirement or under specific conditions as mentioned by the EPFO, the employee can withdraw the entire amount and the interest accrued on it.
- The employee can claim tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961. This tax deduction claim can only be made on the contributions by the employee and not the employer.
- Up to ₹2.5 lakh interest on the employee's contribution and on the employer's contribution, there is no tax liability.
Note: The Central Government decides the rate of interest for the EPF1, and for the financial year 2024-25, it is 8.25% per annum6!
What is NPS?
The National Pension Scheme (NPS) is another retirement plan in India. The Pension Fund Regulatory and Development Authority (PFRDA) and the central government manage NPS.
Let's understand what is NPS:
- NPS accounts are of 2 types: Tier 1 and Tier 2 accounts
- Indian citizens (except armed forces) can open NPS accounts if they are between 18 and 70 years of age
- The minimum contribution to open an account is ₹500 for a Tier 1 account and ₹250 for a Tier 2 account
- Tier 1 NPS account requires a minimum ₹1,000 annual investment
- Upon retirement, the account holder can withdraw a maximum of 60% of the funds. Minimum 40% of the funds have to be invested in an annuity for regular income. However, if the corpus is ₹5 lakhs or less, then the entire amount can be withdrawn.
- Depending on the market performance, the returns are accrued in NPS
Here are the tax benefits that you can avail with NPS.
- To Self-Contribution7
Under section 80 CCD(1), a tax deduction of 10% of salary (Basic + DA) can be claimed. It is under the overall limit of ₹1.5 lakhs under Section 80 CCE of the Income Tax Act of 1961.
Over and above Section 80CCE, a tax deduction of ₹50,000 can be claimed under Section 80 CCD(1B).
- To Employer's Contribution7
10% of salary (Basic + DA) can be claimed under Section 80 CCD(2) of the Income Tax Act of 1961. It can be claimed up to 14% if the contribution is made by the central government. This is over and above the limit of ₹1.50 lakh under Section 80 CCE.
- To Self-Employed7
Self-employed individuals can claim tax deductions of 20 % of gross income under Section 80 CCD (1). This is within the overall limit of ₹1.50 lakh under Section 80 CCE of the Income Tax Act of 1961.
Above this, tax deduction up to ₹50,000 can be claimed under Section 80 CCD(1B).
- On Partial Withdrawal7
Withdrawal of up to 25% of the self-contribution is eligible for tax exemption. Section 10(12B) of PFRDA specifies this term.
- On Annuity Purchase7
If an annuity is purchased after 60 years of age, tax exemption is permitted under section 80CCD(5) of the Income Tax Act of 1961. The income from annuity is, however, taxable under Section 80CCD(3).
- On Lump-sum Withdrawal 7
Section 10(12A) of the Income Tax Act of 1961 lets you avail tax exemption if the lump-sum withdrawal (up to 60% of the corpus) is done after 60 years of age.
- To Corporations/Employers7
Employer's contribution is eligible for tax deductions up to 10% of the salary (Basic + DA) under Section 36(1)(iv)(a) of the Income Tax Act of 1961.
Note: Parents can open an NPS Vatsalya account for their children below 18 years of age.
Tip: Use the NPS calculator to get a fair idea of the returns you can receive over time!
Key Differences Between EPF and NPS
Some of the striking differences between NPS and EPF are given in the table below:
| Particulars | NPS³ | EPF² |
|---|
Eligibility Criteria
| - Any Indian citizen between 18 and 70 years is eligible (except armed forces)
- To open an NPS Tier 2 account, you must first have an NPS Tier 1 account
| - Salaried employees can open EPF accounts
- Employees who earn up to ₹15,000/month as basic pay have to open an EPF account mandatorily
|
Contribution Type
| The national pension scheme Tier 1 is mandatory for government employees. It is a voluntary investment scheme for others. A Tier 2 account is voluntary for everyone
| An employee's provident fund account is mandatory for salaried employees in India. You may also transfer your EPF account if you change employment
|
Return Type
| NPS returns are dependent on market performance. There is no fixed return in NPS.
| EPF is not invested in market-linked funds. So, it is a guaranteed return scheme
|
Investment Choices
| The account holder may actively choose funds for investment through the active investment choice. If you choose auto investment choice, then you to invest in a Life-cycle fund in which the proportion of funds invested across three asset classes are determined by a pre-defined portfolio and would change as per your age.
| EPF is a retirement savings scheme which offers fixed , guaranteed returns.
|
Risk Profile
| NPS invests in market-linked funds. So, although NPS is a long-term investment, the returns depend on the market performance.
| EPF is a savings scheme with guaranteed returns. Hence, there are no market-linked risks in EPF funds
|
Retirement Benefits
| - Upon retirement, the account holder can withdraw a maximum of 60% of the invested funds. The remaining amount, at least 40% of the funds, has to be invested in annuity funds that can generate regular income
- If the fund is less than ₹5 lakhs, the entire amount can be withdrawn without purchasing annuity plans8
| EPF funds accrue interest until retirement. Upon retirement, the account holder can withdraw the EPF balance amount
|
Pre-mature Withdrawal Rules
| - Government sector (who joined before 60 years of age):
If the subscriber opts for premature exit before 60 years of age or superannuation, the entire amount can be withdrawn as lump sum if it doesn't exceed ₹2.5 lakhs.
If the corpus exceeds ₹2.5 lakhs, a minimum 80% of the corpus has to be used to purchase annuity plans.
- Non-government sector (who joined before 60 years of age) :
The premature exit rules for non-government sector subscribers remain similar to those of the government sector.
- Subscribers who joined after age of 60 years
If the subscriber opts for premature withdrawal before completion of 3 years of NPS, the entire amount can be withdrawn as a lump sum if the corpus doesn't exceed ₹2.5 lakhs.
If the balance exceeds ₹2.5 lakhs, a minimum of 80% of the amount must be used to purchase annuity plans.
If the account holder joined before 60 years of age, in an unfortunate event of their death, the nominee can withdraw the entire NPS balance amount if it is less than ₹5 lakhs.
Upon death of the subscriber, entire corpus is paid as lump-sum to the legal heir if the subscriber joined the scheme after 60 years of age9
| - EPF account holders can withdraw funds before retirement
- A maximum of 75% funds can be withdrawn before retirement if unemployed for 1 month
- 100% of the funds can be withdrawn if unemployed for 2 months
|
Tax Benefits (Under Income Tax Act of 1961)
| - Sec 80 CCD (1), account holders can claim up to ₹1.5 lakhs tax deduction⁴
- Under subsection 80CCD (1B), up to ₹50,000 can be claimed for investment in a Tier 1 NPS account⁴
| - An employee can claim ₹1.5 lakhs in tax deductions under Section 80C for their contribution (only in the old tax regime)
- Post financial year 20-21, if the employer's contribution to NPS, EPF and superannuation exceeds ₹7.5 lakhs, it is taxable
|
The table above gives a detailed understanding of EPF vs NPS. While EPF is compulsory for salaried employees, the NPS Tier 1 account is mandatory for government employees and optional for others. Reading the differences between PF and NPS can help in your retirement planning!
EPF vs NPS: Which is Better?
Are you confused between EPF and NPS? For more clarity. There are several factors that you should consider, as the choice depends on the individual's financial goals, type of employment, and age. Here we have listed EPS vs NPS details below:
- EPF is a mandatory scheme for salaried individuals, but the NPS Tier 1 account is mandatory for government employees. So, depending on your profession, you may choose one or both. 5
- If you are looking for a retirement scheme with stable and guaranteed returns, EPF may be a suitable option, as it is a savings scheme.
- However, if you want market-linked returns on your retirement, NPS can be the right choice as it invests in market-linked funds.
- It is also worth noting that while NPS may allow withdrawal before retirement. If the amount exceeds ₹2.5 lakhs, EPF lets you withdraw 100% of the funds if you are unemployed for 2 months. 2,3
- Both schemes offer tax benefits under the Income Tax Act of 1961.
Key Takeaways
- NPS and EPF are both government-backed retirement plans
- A NPS Tier 1 account is mandatory for government employees, and an EPF is mandatory for salaried employees
- NPS invests in market-linked funds, and EPF is a guaranteed savings scheme
- NPS requires you to invest at least 40% funds in annuity funds upon retirement (if the corpus exceeds ₹5 lakhs). In EPF, the entire fund can be withdrawn upon retirement.
Conclusion
NPS and EPF are two popular government-backed retirement schemes. Once you understand the differences between EPF and NPS, it becomes easier to decide which is the most suitable scheme for you! Start your retirement planning today!
FAQs
Can I contribute to both EPF and NPS simultaneously?
Yes, you can have both an NPS and an EPF account simultaneously! It can maximize your retirement corpus .
Is NPS better than EPF for tax savings?
Both NPS and EPF offer tax benefits under various sections of the Income Tax Act of 1961. Depending on your dedicated amount for the account and financial goal, you may choose either one or both.
How can I get an NPS transaction statement?
Annual transaction statements for NPS are sent by Protean CRS to the registered address or email ID of the subscriber (as opted). The monthly transaction statement is sent to the email ID of the subscriber.
Are the returns on NPS guaranteed like EPF?
No. Returns in the National Pension Scheme are based on market performance. Unlike EPF, NPS does not guarantee returns. If the market performance of the underlying asset is high , you may expect higher returns . However, it may go the other way as well.
Can NPS be joined by self-employed or unorganised sector workers?
Yes. NPS accounts can be opened by self-employed individuals and even those from the unorganised sectors. For government employees, a Tier 1 NPS account is mandatory.
What are the withdrawal rules in EPF vs NPS before retirement?
In EPF, you can withdraw 75% funds if unemployed for 1 month and the entire amount if unemployed for 2 months. Partial withdrawal under specific conditions is allowed. In NPS, you can withdraw before retirement. However, upon premature exit, if the funds are over ₹2.5 lakhs, at least 80% the funds have to be invested in annuity plans. 2,3
How does the annuity work in NPS, and is it mandatory?
Typically, an annuity investment of at least 40% is mandatory in NPS upon retirement. However, in some cases, subject to the corpus, a premature exit may be allowed.3
