Controversy is raging over the government’s Budget 2016-17 proposal to tax 60 per cent of Employees Provident Fund corpus on contributions made after April 1, 2016. As the government is under pressure to withdraw the provision, the debate must have raised curiosity on retirements products available in the country.
Against this backdrop, we look at what the three major retirement schemes – EPF, Public Provident Fund and National Pension Scheme – have on offer for you. While EPF is run by the Employees’ Provident Fund Organisation (EPFO), the other old-age income security scheme – the Public Provident Fund (PPF) – is sponsored by the government and the National Pension Scheme is sponsored by the Pension Fund Regulatory and Development Authority (PFRDA).
While EPF and PPF have been around for a while, the NPS has been a recent entrant and a slow-starter. However, NPS is likely to pick up steam with Finance Minister Arun Jaitley providing tax benefits at withdrawal with the long-term aim to bring parity on the taxation front with EPF.
PPF, however, remains totally exempted throughout its period. For PPF, at 8.7 per cent annual rate of interest, the Economic Survey pointed out that after factoring in tax rate on deposit and interest, the effective interest rate actually comes to a high 16 per cent.
The NPS, which has been a late starter in the retirement fund race, offers market-linked returns with a maximum equity investment of 50 per cent from subscriber money permitted under the scheme, providing a window to beat returns from PPF and EPF in the long run. However, there are risks associated to this. The scheme also offers a 100 per cent debt option for the risk-averse investors. The scheme,where subscribers have the option to choose from 8 fund managers, has one of the lowest costs associated with it.
We list out some of the main highlights of the three schemes – EPF, PPF and NPS- as a ready-reckoner for you.
EMPLOYEES PROVIDENT FUND SCHEME (EPF)
Eligibility: Employees drawing basic salary of Rs 15,000 have to compulsory contribute to the Provident fund and employees drawing above Rs 15,000 have an option to become member of the Provident Fund
Where to open: Scheme is provided by Employees’ Provident Fund Organisation (EPFO) through organisation enrolled with it. Your office will open the account for you if they employ 20 persons or more
Investment limit: Employee contributes 12 per cent of basic salary and and equivalent amount is contributed by the Employer.
Returns: EPF funds will earn a 8.8 per cent for 2015-16, marginally up from the previous 8.75 per cent.
Duration/maturity: Till the retirement of the employee or the employee opting out of
Loans/Withdrawals: You can withdraw from EPF account for children’s education, marriage of self, children and siblings, purchase/construction of a house or any medical emergencies. However, withdrawal is subject to certain conditions:
• Minimum 7 years of service;
• Maximum 3 withdrawals during which you hold the EPF sAccount;
• Maximum aggregate withdrawal would be 50% of the total contributions made by you.
For medical emergencies, there is no minimum service period. However, the maximum amount one can withdraw is 6 times the basic salary and proof of hospitalisation is required.
However, withdrawal for purchase/construction of house is available only once in an individual’s working life. The minimum service period is 5 years and the maximum withdrawable amount is 36 times your total salary (for construction of property) and 24 times (for purchase of property).
Tax Benefits: Currently enjoys the Exempt, Exempt, Exempt (EEE) status. However, Budget 2016-17 has stoked a massive controversy by proposing that has proposed that only 40 per cent of the contributions made to EPF after April 1, 2016, will be tax-free on withdrawal. With widespread opposition to the move, the government is likely to reconsider its decision and a final word is awaited.
Nomination: Subscriber can nominate one or more person belonging to his family. If he has no family he can nominate any person or persons of his choice but if he subsequently acquires family, such nomination becomes invalid and he will have to make a fresh nomination of one or more persons belonging to his family. You cannot make your brother your nominee as per the Acts.
Transfer of Account: Account is transferable with change of change of job of subscriber
PUBLIC PROVIDENT FUND (PPF)
Eligibility: Individuals can open account in their name, also open another account on behalf of a minor. Joint/NRI/HUF accounts cannot be opened.
Where to open: Post offices, public sector banks and few private banks offer the government-run scheme.
Investment Limit: Minimum Rs 500 with a cap of Rs 1.5 lakhs per annum. Deposits can be made in one lump-sum or in 12 installments per year.
Interest Rate/Returns: 8.7 per annum with effect from April 1, 2015. Interest is paid on March 31 every year. Interest calculated on monthly basis on the minimum balance between 5th and last day of the month.
Scheme Duration: 15 years with the provision to extend in one or more blocks of 5 years each. Premature closure is not allowed before 15 years.
Loans/withdrawals: Available from third financial year. Part withdrawal is permitted from 7th Financial Year
Taxation: PPF comes under the Exempt, Exempt and Exempt (EEE) category which makes it tax exempt from investment till maturity. Subscription qualifies for tax benefits under 80C of Income Tax Act.
Nomination: One or more persons can be nominated
Transfer of Account: The PPF account can be transferred free of charge to another branch, another bank or post office.
NATIONAL PENSION SCHEME (NPS)
Eligibility: All citizens between 18 and 60 years as on the date of submission of application
Where to open: Authorised Points of Presence (POP) and almost all private and public sector banks apart from several other financial institutions offer the scheme.
Investment limit: (For Tier-1 non-withdrawable) minimum Contributions is Rs 500 with a total minimum contribution per year at Rs 6,000. For Tier-II (withdrawable) minimum contributions Rs 250 with minimum balance of Rs 2000. No cap on maximum investment.
Returns: NPS offers market-linked returns. Being a defined contribution scheme where subscribers contribute to his account, there is no defined benefit that would be available at the time of maturity. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
Duration/maturity: Maturity of scheme is at age 60
Loans/Withdrawals: On retirement, a subscriber can opt out of NPS. However, the subscriber would be required to invest minimum 40 per cent of the accumulated savings to purchase a life annuity, while remaining can be taken out a lump-sum.
Tax Benefits: Tier-I account is exempt, exempt, taxed (EET). The amount contributed is entitled for deduction from gross total income upto Rs 1 lakh (along with other prescribed investments) as per section 80C of the Income Tax Act.
The Union Budget 2016-17 has proposed that 40% of retirement corpus of a subscriber of National Pension Scheme (NPS) at the time of retirement will be tax exempt. Further, annuity payment to the legal heir after the death of pensioner has been made exempt from tax.
Nomination: In the event of death of the subscriber, the nominee can receive 100 per cent of the NPS pension wealth in lump sum.
Transfer of Account: Provides full portability within geographies and between POPs