Tuesday, 5 April 2016

EPF Vs NPS: Which is better

Employees Provident Fund (EPF) Taxation issue raised by the Finance Bill, 2016 is over now. The government ultimately withdrew the provision relating to taxing sixty per cent of the amount when withdrawn by an employee from his EPF account.

The basic purpose of introducing this provision was to bring similarity in EPF and NPS taxation provisions. At present EPF falls under exempt, exempt, exempt (EEE) category while National pension Scheme(NPS) falls under exempt, exempt, tax (EET) category.

Simply stating, both EPF and NPS qualify for income tax exemption at the time of contributing money to the respective funds as well as at the time of accrual of income to the fund deposits. But at the time of making withdrawals from the funds existing income tax provisions are different for the two.

Withdrawal in lump sum from NPS after attaining the age of sixty is allowed to the extent of sixty per cent of the total corpus at the credit of the NPS subscriber. Minimum forty percent of the credit balance is to be utilized compulsorily for purchase of monthly pension/annuity to the subscriber. One hundred per cent cash withdrawal is not allowed. Lump sum cash withdrawal from NPS before the age of superannuation is restricted to twenty percent only rest eighty per cent is to be utilized for purchase of monthly annuity/pension.

Lump sum cash withdrawal from EPF account at the time of retirement is allowed to any extent as per existing law. However, an employee can withdraw his fund (EPF) even before the date of superannuation in case of loss of his employment after a waiting period of two months or in case of medical emergency or for children education or marriage of children.

Some background on NPS

National Pension System(NPS) was started by the Government of India for the benefit of the government employees in the year 2004 because government then decided not to give pension from its own sources to its new employees. In the year 2009 this scheme was open for general public also and now, in addition to the government employees and employees of statutory corporations any other person whether employed in private sector or self-employed or businessman or a housewife can join NPS for his future financial security. The basic purpose of this scheme is to create a pensioned society by providing a source of income for all in old age. This is a good scheme but due to some reasons this could not catch fancies of the public.

Some background on EPF

EPF is for the workers employed in organized sector where both employers and employees contribute to the fund which is managed by the Employees Provident Fund Organization (EPFO). The corpus is invested mainly in fixed income securities and interest is credited annually to the employees account at a fixed rate decided every year by the EPFO Board. There is made no discrimination in between old and new fund accounts in matters of income distribution. Interest is credited at even rate to all EPF accounts.

Let us now understand the difference between an EPF account and a NPS account from the point view of eligibility, investment criteria and taxation etc.:

Differences between EPF and NPS

Basis of distinction EPF NPS
Eligibility and purpose of joining Only organized sector employees can become member of EPF by virtue of the provisions of EPF ACT. All establishments where 20 or more workers are employed on regular basis are required to offer benefits of EPF to their employees. Any employee whose basic salary is up to Rupees 15,000 has to be mandatorily offered the benefit of EPF. However, the Act does not prohibit the employers from offering this benefit to the employees drawing higher salaries.

The basic purpose of this scheme is to create retirement fund and, in addition, provide post retirement pension to the employees.

NPS is primarily for the government employees appointed after discontinuance of government pension in 2004. NPS is mandatory For the central government, many state governments' employees since 2004. After 2010 it is mandatory for PSU banks employees.

After amendment in the scheme in 2009 now any Indian citizen, including the above, can join the scheme and contribute to it to avail old age benefits in the form of annuities. The minimum age of entry is 18 years. No entry is allowed after attaining age of sixty years.

The purpose of this scheme is to provide a facility of savings for old age to all Indian citizens and provision of old age pension as well.

Mode of opening and operating account In case of EPF an eligible employee has to make no efforts to join the fund. It is obligatory on the employers to take the requisite steps to ensure that all the eligible employees become member of EPF. The contribution of an employee is compulsorily deducted @12% of basic salary from his monthly salary and deposited by the employer to his fund account. The employer also makes a matching contribution to the employee's fund. The employees themselves have to do nothing to make deposits in EPF.

An employee cannot open EPF account but with the help of Universal Account Number he can operate it online. It is possible to transfer the account after change of job.

Joining NPS is purely voluntary for a person not being government and public sector companies including PSU banks' employees. Any eligible person can open his account as per scheme drawn by the Pension Fund Regulatory and Development Authority (PFRDA) through a Point of Presence (POP) to take advantage of the scheme. The subscribers themselves have to open their NPS accounts and deposit their contributions to the scheme like, they deposit their PPF subscriptions. An EPF/PPF account holder can also open NPS account.

Online opening and operation of NPS account is possible.

Mode of Investment Mandatory amount of subscription is 12% of basic salary plus employer's share at equal rate. However, employee himself can contribute a higher amount to his EPF account. In the case central government, state governments' and PSUs employees both the employees and the employers contribute @ 10% of the basic salary to the NPS account.

In rest of the cases subscription to the scheme can be made for a minimum sum of Rupees six thousand per year or Rupees five hundred per month. There is no upper limit for deposit. Minimum of one subscription of Rupees six thousand in a year is compulsory. Minimum amount of a subscription is Rupees five hundred. Regular monthly contribution to NPS is not mandatory.

Tax treatment EPF enjoys Exempt, Exempt and Exempt status from income tax point of view. The employers' contribution to EPF is not taxable. Employees own contribution to the fund qualifies for deduction to the extent of Rupees one lakh fifty thousand u/s 80C of Income Tax Act comprising of EPF contribution of the employee, insurance premiums paid, children education (tuition) fee, PPF contribution, etc. while computing taxable income. (A.Y. 2016-17 & A.Y.2017-18)

Interest credited to the account and withdrawal after five completed years of service from EPF account is also exempted from tax. After retirement the employee can withdraw entire corpus in lump sum without any tax liability.

NPS enjoys Exempt, Exempt and Tax (partial) status from income tax point of view. For NPS subscriptions an additional deduction of Rupees fifty thousand is allowed u/s 80CCD of the Act. NPS contribution of an assessee is first allowed u/s 80C within limit of Rupees one lakh fifty thousand. NPS contribution if not covered fully under this section then the above mentioned additional limit will be utilized. This way one can take advantage of additional tax deduction by subscribing to NPS if the limit of deduction u/s 80C has exhausted.

Income accrued to the NPS account is not taxable in the hands of the subscriber. Post retirement (after the age of sixty) withdrawal from NPS is tax free to the limit of 40% of account balance. Minimum 40% of the NPS corpus needs to be mandatorily utilized for purchase of annuity. Rest 20% can either be withdrawn in lump sum or can be utilized for purchase of annuity. If withdrawn lump sum it is taxed at applicable tax rate. If withdrawn before the age of sixty due to loss of employment or incapability only 20% of lump sum withdrawal is tax free. In this case 80% of the fund balance needs to be invested for grant of annuity.

Asset allocation By the recent past, EPF corpus was invested totally in debt instruments and these were insulated from wild fluctuations of stock market. Off late, decision was taken to invest 5% to 15% of yearly contribution in equity market through ETF. The fund is managed by a trust working under EPFO. A NPS subscriber has the liberty to choose his fund manager from the given panels of fund managers. He also has the right to decide the ratio of equity and debt investments. As default option maximum fifty percent contribution is invested in equity and rest in debt instruments. The ratio of equity investment reduces with every passing year as per scheme of default option.
Return During the past ten years return from EPF has been increasing marginally. For the past financial year (2014-15) it was 8.75% and for the current financial year it will be 8.8%. Returns of NPS are subject to portfolio mix (ratio of debt and equity investment) decided by the subscriber. If stock market does not show much vitality it is expected to be yield more than 10% per annum for 40% equity and 60% debt investment portfolio.

Note that the above mentioned rules and details relating to NPS are in relation to tier I account only. Where an NPS account is opened through an employer (Government, PSU or Corporation) it is always a tier I account meant for post-retirement provisions. This is a non-withdrawable account. Money cannot be withdrawn before retirement/cession of service or death of the employee.

Tier II account can be opened by an individual directly. Tier II NPS account is withdrawable saving account with no tax benefits where money can be withdrawn at any time without any of the aforesaid limits.

That's all for this topic EPF Vs NPS: Which is better. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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  3. Tax exemption benefits of National Pension System(NPS)
  4. EEE EET ETE explained

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  1. Can you please provide me EPF Customer Care Number for the solution of my queries regarding the EPF services.

  2. epfo login is abbreviated as Employee’s Provident Fund Organisation. Now a days the cost of living has become very high and it is not easy to buy things for middle-class people when needed
    epf login