NPS V/s EPF

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In the last article, we had understood the features of NPS as a retirement solution. EPF is also considered by many of us as a good retirement solution and is usually a part of every employee’s CTC. We would like to highlight some main points of comparison between NPS and EPF.

NPS	EPF

 

The main purpose of NPS is that it provides a fixed monthly income on retirement.

EPF is received as a lumpsum amount which will then have to be planned and invested with the help of an advisor, so as to receive a fixed monthly income from it.

 

NPS provides the option of investing in Equity, Corporate & Government Debt depending on the subscriber age.

EPF invest in debt or Fixed income instruments only, thus provide fixed returns.

 

The minimum contribution for NPS is Rs 500 for Tier I Account and Rs 1000 for Tier II Account.

The minimum contribution is 12% of Basic plus DA OF Employee’s salary which has to be contributed by both Employee and Employer. However the employee has an option to contribute more than 12% through Voluntary Provident Fund.

 

NPS as a solution does not guarantee a fixed rate of return. The rate of return depends on the allocation of debt and equity in the portfolio and they are market linked. The average rate of return is around 9 – 10%.

The rate of return on PF is fixed and is usually announced on an annual basis. Thus in PF returns are assured. The current rate of return is 8.5%.

 

A contribution made to NPS is available for deduction up to Rs 1.5 lacs under section 80 C. Apart from that an additional deduction of Rs 50,000 is applicable under section 80CCD(1B). Contribution by the employer to NPS is deductible in the hands of employee(Section 80CCD(2) Limited to 10% of salary of the employee. However these deductions are available only for Tier I accounts.

A deduction of the Employee’s contribution to the limit of Rs 1.5 Lacs is available under Section 80 C of the Income Tax Act.

 

NPS can be withdrawn only at retirement ,60% of the amount can be withdrawn as lumpsum while 40% has to be put into an annuity plan so as to receive monthly pension. Partial withdrawal is allowed only up to 20% and for the specified reasons like Higher Education, Marriage of children etc that too only after completion of 10 years.

Since this is a retirement solution, it is advised to withdraw only at retirement . Full withdrawal can be done at retirement or if the subscriber is unemployed for 2 months. Partial withdrawal is allowed in case of certain events such as house purchase , marriage, medical emergency.

 

In NPS 60% withdrawn as lumpsum is completely tax free whereas 40% which is received monthly through annuity plan is taxable.

If withdrawn after 5 years , EPF is completely tax free. However as per the new rules, any contribution to EPF, VPF above Rs 2.5 Lacs, any interest on the excess contribution will be taxable.

 

Conclusion:

 

As it can be seen both that both the products have their own set of pros and cons. The investment in any of the above depends on the risk appetite, the liquidity required, returns and Tax applicability of the subscriber.