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EPF vs NPS

The Employee Provident Fund Scheme and the National Pension Scheme are two of the most popular retirement corpus building tools introduced by the government of India. These tools were introduced by the Indian government to mobilize the saving and investment psychology within the minds of the salaried individuals. Creating a corpus for post-retirement phase is very important as the source of income is depleted, once an individual reaches the age of 60. So, these schemes were designed to offer an opportunity to create a corpus by contributing regularly. The accumulated corpus shall thereby furnish the financial needs arising in their later years of life.

Apart from creating a retirement fund, both these schemes are the best tools that offer financial cover to overcome financial emergencies like medical treatment, marriage of children, education of children etc. Both the schemes offer some key differential features and benefits to its subscribers. The following article shall illustrate the key parameters of both the schemes. Read on to know in detail about the Employee Provident Fund Scheme and National Pension Scheme.

Differences Between EPF vs NPS

Both the schemes i.e. NPS and EPF are not an alternative product of each other, rather they are complementary products which every subscriber must avail in their investment portfolio. However, both the products showcase distinct differentiation on the following parameters:

Eligibility

The EPF account can be opened by the employers of salaried individuals. Organisations who have a strength of 20 or more of workforce has to compulsorily open an EPF account for each employee working in their organisation. On the other hand, investing in NPS is mandatory for Government employees who have started their service post April 2004. Apart from government employees, even non-government employees like businessmen, self-employed individuals, employees of organised or un-organized sectors, can invest in NPS as the scheme is open to general public. Thus, a working employee, whether with government sector or private sector, can plan for his retirement by investing in either EPF or NPS. But if a non-salaried subscriber is a businessman, home-maker, or self-employed individual, then he can plan for his / her retirement by investing in NPS only.

Mode of investment

Under the EPF scheme, the mode of investment is systematic as the contribution amount is directly deducted from the employee’s basic salary. A contribution of 12% of his basic salary + dearness allowance is deducted from his salary and the employee does not have to do anything in regards to investing in the scheme. However, under NPS, the subscriber has to invest the money in the scheme. NPS is a voluntary investment tool where the investor has to carry out the investment procedure, either in lump sum or in instalments as per the convenience of the subscriber.

Minimum/Maximum amount of investment

Under the NPS scheme, the minimum amount of investment per year is Rs. 6,000 while there is no restriction on the upper limit. On the other hand, under the EPF scheme, there is restriction on the amount of investment. The employer contribution is capped to 12% out of which the employer can contribute 3.67% to the employee provident fund account, while the remaining balance is contributed to EPS, EDLI, administration charges etc. The contribution of the 3.67% is based on the employee’s basic salary + dearness allowance. On the other hand, the employee also contributes 12% to the EPF account, but he/she can opt to contribution extra amount. Thus, there is no restriction on amount of investment in case of employee while the contribution of employer has some restrictions.

Asset allocation

The EPF scheme is a conservative scheme, this scheme is designed to invest in debt instruments. Under EPF scheme, the entire accumulated corpus is invested in debt instruments. The main motive of the scheme is to create a retirement corpus. So traditionally, the entire asset allocation was done in the debt-heavy instrument. However, recently the EPFO has been allowed to invest the accumulated corpus in equity-oriented schemes. Under this scheme, the investment in equity markets is capped to maximum 15% of fresh annual contribution.

Under the NPS scheme, the investor can choose the type of investment they want to make. The investors are allowed to choose between – either doing asset allocation all by themselves or can opt for default asset allocation. If the investor chooses to self-manage the asset allocation, then the maximum asset allocation allowed is capped to 50% whereas under the default option, the asset allocation in equity-oriented instruments decreases with every year up to the age of retirement of the subscriber. The subscribers of the NPS can also opt for fund managers who manage their funds and look after the asset allocation under these funds. The scheme offers subscribers a choice of 6 fund managers to choose from.

Expected returns

Both the schemes offer lucrative returns, however the key differentiating points is that under the EPF scheme, the return earned by all the subscribers is same and most importantly, the returns are assured. The rate of interest on the EPF scheme is reviewed every year, and currently it offers returns at 8.65%. This interest rate is same for all the subscribers and in coming years, the returns are expected to be similar or slightly more/ less as per the economic condition of the country.

On the other hand, under the NPS scheme, the corpus is invested in market-based instruments so the investors can expect a higher return on their investment. However, the investors also have to deal with the market volatility. Hence, even if investment in equity-based instruments gives higher returns, but they are not assured as the returns are completely based on the performance of the market. However, the returns are usually high if the investment is kept intact over a long tenure.

Tax benefits

Both the schemes offer tax benefits as under:

  • Contributions made towards: a. Under the EPF Scheme, all the contributions made towards the EPF account are eligible to receive tax deduction under Section 80C of the Income Tax Act, 1961. This tax benefit is available along with other investment instruments like PPF, tuition fees, tax free fixed deposit etc. The maximum tax benefit limit under Section 80C is of Rs 1.50 Lakhs. b. Under the NPS scheme, the investor can avail tax benefit under Section 80C of the Income Tax Act, 1961. However, an additional exclusive tax deduction is available for NPS investors up to a maximum limit of Rs. 50,000 under Section 80CCD (1B) of the Income Tax Act. The tax deduction benefit offered under the Section 80CCD (1B) can be availed over and above the tax deduction allowed under Section 80C.
  • On Maturity: a. At the time of maturity of EPF account, the total amount received is tax-free in the hands of the subscriber. Similarly, the subscribers can withdraw the entire corpus from the EPF account at the time of retirement. b. However, under the NPS scheme, the subscribers can withdraw up to 40% of the accumulated corpus from the account without any tax obligation. While the balance 60% must be invested by the subscriber for buying an annuity plan.

Kindly note, under the NPS scheme the subscriber, under no circumstances, can one withdraw the entire accumulated corpus from the NPS account as the investor has to invest 40% of the corpus in buying an annuity plan. An investor can however, invest 100% of the NPS accumulated corpus in buying an annuity plan.

What is EPF?

EPF stands for Employee Provident Fund, which is retirement scheme introduced by the Indian government. This scheme offers opportunity to the investor to invest a certain sum of money every month in the EPF account which shall continue till the retirement age of the investor. On retirement, the investor can withdraw the entire accumulated fund from the EPF account and utilize it for safeguarding the future financial needs arising during the retirement phase.

Having an EPF account ensures savings-cum-investment as all the corpus invested in the EPF account is eligible to receive interest. This interest rate is subject to yearly review, currently the interest rate offered by the scheme is 8.65%. The scheme mobilizes savings by directly deducting a certain percentage of money from the employee’s salary and investing it in the EPF account.

Under this scheme, both the employee and employer invest in the PF account. 12% of basic salary plus dearness allowance is deducted from the employee’s salary and deposited as employee’s contribution in the EPF account. Similarly, the employee also contributes 12% towards EPF. However, this 12% is distributed amongst various schemes like: 3.67% in the EPF, 8.33% in EPS, EDLI, administration charges etc. Thus, this scheme is designed to secure the retired individuals financially.

Who Can Invest in EPF?

EPF account can be opened by the employer in the name of its employee. Every salary individual can invest in the EPF account. A 12% contribution is made in the EPF account by the employer on behalf of employee by deducting the specific amount from their salary.

What is NPS?

NPS stands for National Pension Scheme. This is a pension instrument introduced by the government of India in order to promote and mobilize the investments of the individuals in order to offer pension to them post their retirement. The investment made under this account is invested in various market-based instruments and returns are earned on such accumulated corpus. Once the subscriber of the NPS account retires, he/she can withdraw 40% of the accumulated corpus without any tax liability. However the remaining 60% has to be invested in buying an annuity plan. The main motive of this account is offer pension, so the plan emphasizes the subscribers to buy an annuity plan. The subscriber can also invest the entire accumulated corpus for buying an annuity plan, however they cannot withdraw the entire amount.

Who Can Invest in NPS?

The NPS account is an open account and hence, any Indian Citizen can invest in NPS account. Whether resident Indian or non-resident Indian, any one can open this account subject to fulfilment of the following conditions:

  • Subscriber who wish to invest in the NPS account must be between age range of 18 years to 60 years
  • Must comply to all the Know your Customer norms as prescribed in the registration form

FAQs on EPF vs NPS

Is PF and NPS same?

No, both PF and NPS are different savings-cum-investment products. Although both the products are designed to offer financial stability to the subscriber in the post-retirement stage, both products offer different benefits. EPF is a much older scheme as compared NPS. The basic difference between both these products is that NPS offers market linked returns where as EPF offers tax-free returns.

Which is better EPF or NPS?

Choosing EPF or NPS is matter of choice that is based on your financial goal and risk appetite. EPF and NPS are investment tools offered by the central government and both the tools offer attractive returns to the subscribers. EPF offers assured tax-free returns on the investments by providing competitive interest rates per year as the interest rates of the EPF account are subject to review every year. On the other hand, the NPS invests in market-based instruments. Thus, if subscribers are looking for steady growth and have a less risk appetite, they should opt for EPF. Whereas for investors who have a moderate to high risk appetite, NPS as this instrument has a higher potential for earning higher returns.

Is it wise to invest in NPS?

Investing in NPS is similar to investing in equity market as the NPS invests the subscribers’ money in market-link products like the equity bonds, government bonds, corporate bonds etc. Irrespective of its association with the stock market, NPS is still one of the most sought saving-cum-investment tool because it offers competitive returns as compared to other government introduced instruments. NPS has the potential to offer higher returns, provided the investment is made for long duration i.e. 10 years or more.

Should I invest in NPS?

Yes, investing in NPS is a good way of multiplying your hard-earned money. The instrument offers a good opportunity to build a handsome retirement corpus by earning higher returns on investments done in market linked investment instruments.

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