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.
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:
- Nature of scheme - EPF and NPS function differently. EPS is a must for those who have an Employees’ Provident Fund account, but only if their EPF income goes above a certain level. It is a guideline that certain employees have to follow. In contrast, NPS is voluntary. Individuals can choose if they want to join depending on what they want to attain financially. It’s not something an individual has to do.
- Minimum investment required - For the Employee Provident Fund, you can only put up to 12% of the basic monthly income. On the other hand, to invest in an NPS account, you need to invest a minimum of Rs. 1,000 each year for an NPS Tier-1 Account, however, there's no maximum cap on how much you can invest.
- Employer and employee contributions - Employee Pension Scheme, requires the employer to contribute 8.33% of an employee’s basic salary and dearness allowance towards retirement corpus funds or savings. This simply makes sure that money is being flown to the retirement corpus fund. However, if you look at the National Pension scheme system, it does not rely on employer contributions. This means that an investor or employee can decide how much money they want to keep aside for their retirement. Also, with EPS, employees don’t have to directly contribute the funds, but with NPS, they can opt to put in additional funds if they want to grow their retirement corpus more.
- Returns and investment strategy - The Employee Provident Fund is known for providing a steady income when an individual retires from his job or profession. The EPF interest rate are reviewed every year. For the financial year 2024, it is fixed at 8.25%. But NPS on the other hand offers returns that can change depending on how the market is doing in terms of volatility. NPS spreads out investors’ funds in various types of investment instruments like Government Bonds, Corporate Debt and Equities, Shares, etc. This type of diversification aims to provide good returns while lowering the probability of losing money. With NPS, you can navigate on your own where to invest based on your risk-taking ability and financial goals.
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Also Read- NPS vs PPF.
- Eligibility criteria - The employee Provident Fund Scheme is designed for employees whose total salary and dearness allowance amount to Rs. 15,000 or less. This covers a major portion of the workforce, ensuring that a wide range of employees, particularly those with lower income levels, can benefit from the scheme. It is kind of like a safety net for those who may not have a high income but still want to collect or save money for their retirement. In contrast, NPS has a wider scope, it is available to all Indian citizens aged 18 to 70, regardless of their employment status or income level. This means that almost anyone in the country, whether they are working in a corporate job, self-employed (business), or even unemployed individuals can join NPS and start planning for their retirement/ financial future.
- Tax benefits - Both EPF and NPS help individuals save on taxes. With EPS, the pension fund you get when you retire from your job is tax-free. This means that retirees don’t have to pay taxes on the funds they receive from their person, which can be a very big relief. NPS, however, works distinctively. When you invest in NPS, you can get tax deductions under Section 80C of the Income Tax Act, of 1961. This means that you can save on taxes for the funds you invest in NPS up to Rs. 1.5 lakh only. Additionally, you can also get an extra tax deduction of Rs. 50,000 under Section 80CCD (1B) If you put your funds in NPS.
- Withdrawal of funds - EPF and NPS have different guidelines for taking out the funds. With EPF, you can start getting a pension when you attain the age of 58. Also, if you are 50 years old or have worked for at least 10 years, you can take out some amount through Form 10C from your accumulated corpus early if you have a requirement. You can get an early retirement pension or lump sum payment, depending on what works best for you as per your financial goals. In contrast, NPS allows more flexibility. 60% of the matured corpus can be withdrawn once the individual attains age 60. The remaining 40% must be compulsorily used to purchase an annuity. Also, you can keep your funds in NPS until you are 70, allowing more time to manage your savings. Additionally, with NPS, you can take out some of the funds partially if one has encountered some unexpected expenses or specific financial goals. This simply means you do not have to liquidate all your savings in one go.
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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