What is EPF?
The Employee Provident Fund (EPF) is a retirement savings plan administered by the Indian Government, designed to support employees in building a substantial financial nest egg for their retirement years. This scheme operates akin to a dedicated savings account, enabling employees to allocate a fraction of their earnings consistently throughout their employment tenure. As these contributions grow over time, they accrue interest, which is compounded, thereby enhancing the value of the saved corpus. This mechanism ensures that employees have a strong financial foundation upon retiring, enabling their financial security after their work income has stopped.
Read Also: Check EPFO Pension Status
What is NPS?
Launched by the Indian government, the National Pension Scheme (NPS) stands as a strategic social security endeavor aimed at promoting a culture of savings among its citizens. This scheme is inclusive, catering to employees across various sectors—be it public, private, or the unorganized sectors—with the sole exception of armed forces personnel. The NPS serves as a financial safety net, providing individuals with a reservoir of funds that they can rely upon in their retirement or later years. By participating in NPS, individuals not only ensure that they systematically set aside money for the future but also fortify their financial well-being, securing their livelihood as they age.
NPS and EPF are excellent long-term retirement savings tools. However, for situations requiring more flexibility or potential for higher returns, consider diversifying with other options like Fixed Deposits
FD offers predictable returns, preservation of capital, and the potential for loans against your fixed deposit. Ideal for short to mid-term goals.
Differences between EPF and NPS
Let us review the differences between EPF and NPF in detail. The major differences between the two schemes are as follows:
Feature
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NPS (National Pension System)
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EPF (Employees’ Provident Fund)
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Investment of Contributions
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Two modes: Active and Auto. Active allows up to 50% in equity, while Auto adjusts allocation based on age. Government employees’ contributions have only 15% equity exposure.
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Invests in government securities, PSU bonds, and deposits. Returns are independent of market conditions, with compounding interest paid regularly.
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Rate of Returns
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Varies with market performance and investment allocation. Example returns: 2012-2013: 9.76%, 2013-2014: 5.37%, 2014-2015: 19.63%; Overall average: 10.35%.
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Average returns typically range between 8.00% and 8.50% p.a.
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Liquidity and Withdrawals
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Withdrawals allowed at age 60, with 40% invested in an annuity. Partial withdrawals permitted if 80% is invested in an annuity.
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Withdrawals allowed for specific purposes such as medical treatment, home purchase, or education, with limits based on salary multiples.
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Tax Benefits and Deductions
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Contributions up to Rs. 2 lakh are deductible under Sections 80C and 80CCD(1B). Only Rs. 50,000 can be claimed separately under Section 80CCD(1B). Withdrawals, except for annuities, are taxable.
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Contributions, interest earned, and withdrawals are fully tax-free under Section 80C. No additional tax benefits beyond standard 80C deductions.
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Why join nps instead of EPF?
For professionals in the corporate sector, planning for a comfortable and secure retirement is a priority. While EPF provides steady returns of around 8.5%, relying solely on it may not be sufficient to build a substantial retirement corpus. To ensure a robust post-retirement income, incorporating a pension plan like NPS is essential.
Deepak Mohanty, Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), emphasizes the importance of having a pension account as part of one’s savings portfolio. He compares it to a balanced Indian thali, saying, “A savings portfolio should have a healthy mix of instruments—savings, equities, mutual funds, pension accounts—to make it complete. Pension should be an essential item on the menu of your savings.”
Research by leading retirement advisory firms indicates that investing solely in EPF covers only about 32% of the required retirement corpus, which may increase to 50% when considering superannuation benefits. However, including NPS in your portfolio can help cover up to 68% of your retirement needs, significantly enhancing your post-retirement financial security.
Additionally, NPS has historically delivered approximately 2% higher returns than EPF. While this may seem like a small difference, over the long term, it can make a substantial impact on the growth of your retirement corpus, making NPS a powerful complement to your EPF savings.
How does NPS generate higher returns than EPF?
The difference in returns between NPS and EPF primarily stems from their investment strategies. EPF largely invests in fixed-income securities, providing steady but limited growth. In contrast, NPS allows subscribers to invest in a diversified mix of equities, bonds, liquid funds, and government securities. This allocation toward equities offers higher growth potential over time, contributing to superior long-term returns.
Moreover, NPS investments are marked to market, giving subscribers the flexibility to adjust their portfolio based on risk appetite and preferences. Since its inception, NPS has delivered average returns of 9% to 11%, offering both flexibility and the potential for higher returns compared to EPF’s fixed-interest model.
How can an employee join NPS when they already have an EPF scheme?
While EPF is mandatory for employees earning above Rs. 15,000 per month, employees can still opt to invest in NPS to enhance their retirement savings. Companies can facilitate seamless NPS registration in the following ways:
New Employees: Those not covered under EPF can enroll directly in NPS from the start.
Switching on Job Change: Employees with previous EPF accounts can choose NPS instead of EPF when joining a new organization.
Existing Employees: Current EPF subscribers can continue contributing to EPF while also investing in NPS.
The objective is to maximise retirement benefits for employees. Companies can offer EPF, NPS, or a combination of both, allowing employees to choose based on their financial goals and preferences.
Conclusion
EPF is a government-funded retirement plan. If you are working in the organized part of the economy, a portion of your income will be credited to your EPF account. Your employer will match this input to assist you in saving for the future. NPS, in contrast, is a retirement plan that you can opt for willingly. Apart from the armed forces, everyone can invest in NPS. This encourages you to invest for a longer duration and earn a pension post-retirement from work. Deciding on choosing between EPF vs NPS depends on your investment objectives, the nature of short-term and long-term financial goals, and the risk-taking ability of the individual.
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