With the Supreme Court of India ruling over hike in pension of EPFO subscribers, the Employee Pension Scheme (EPS) is in news again. More because if everything goes well and if retirement fund body EPFO agrees to extend the additional pension benefit to all private sector employees, then the pension of EPFO subscribers may rise several times. However, there are also other options in the market, like National Pension Scheme (NPS), which one can explore for building an adequate nest egg for retirement. So, which one to choose or opting for both would be better? “The Provident Fund (PF) and the Employees’ Pension Scheme (EPS) have traditionally been two of the retirement options available to employees, the nature of benefits available under these two schemes being very different. In recent years, however, the government has been focussing on NPS as an alternative to PF, clearly confirming its intent to promote NPS,” says Saraswathi Kasturirangan, Partner, Deloitte India.
PF and EPS
Domestic employees whose monthly wages (as defined) do not exceed the statutory wage ceiling (currently Rs 15000 p.m) are mandatorily required to contribute 12% of their wages (basic salary plus DA) to the PF account. The employer provides a matching contribution. However, 8.33% of the monthly pay capped to Rs 15000 pm is diverted to the EPS and the balance is remitted to the PF account. Employees whose earning exceed the statutory wage ceiling do have an option to contribute to PF and EPS. However, new joinees after 1 September 2014 with PF wages exceeding Rs 15000 are not covered under EPS. The entire employer contribution of 12% for such employees is diverted to the PF account.
“The PF account earns interest as determined by the Central Board of Trustees of EPFO. The employee is eligible to withdraw the accumulated balance on retirement at the age of 55 years. Early withdrawal in the form of non-refundable loans are permitted for specified purposes. From a tax perspective, the contributions made to the PF / EPS account and the annual accretions are not taxable and this makes it all the more attractive to employees. Withdrawals from the PF account are taxable if the employee does not have a continuous period of employment of 5 years. Contributions by employees to the PF/EPS qualify for deduction from taxable income under Section 80C of the Income Tax under the overall ceiling of Rs 150,000 pm,” says Kasturirangan.
EPS benefits are available in the form of pensions on retirement. Refund of contributions paid are permitted under certain circumstances.
NPS is also a defined contribution scheme and enables Indian citizens including persons of Indian origin in the age group of 18 to 65 to save towards creating a corpus and enables the subscriber to purchase annuity post retirement. NPS is open both to the employees of the corporate sector as well as other individuals. With minimum contributions as low as Rs 500 per month, NPS enables a flexible investment pattern and provides a choice of funds as well as portability across employers.
“Withdrawal is permitted on retirement (premature or regular) as well as on the death of the beneficiary. It is mandatory to invest at least 40% of the accumulations in an annuity scheme on regular retirement, with the percentage being as high as 80% for pre-mature withdrawal. The balance amount could be withdrawn as a lump sum. In the unfortunate event of death of the beneficiary, the entire amount could be withdrawn as a lump sum by the beneficiary. However, it needs to be seen that the NPS is not a defined benefit plan, and the earnings are purely market driven,” informs Kasturirangan.
The advantage of NPS is that there is no requirement to have a fixed contributions to this account, just that the minimum contribution threshold is required to be met. NPS contributions can be made over and above contributions to the PF account.
Which one to choose?
Thus, whether one goes for EPF or NPS, depends upon individual circumstances and the risk profile of the investor. EPF has the advantage of a guaranteed return whereas NPS is market-linked. Again, NPS offers you the flexibility of choosing between various fund options, whereas returns on EPF are tax-free.
“Based on the above, one can say that EPF is better for risk averse investors and for those who do not have the temperament or the knowledge to evaluate different fund options and track them regularly. NPS is certainly better for investors who can track different fund options and are willing to take some chances and aim for higher returns,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
The Supreme Court has directed EPFO to allow investors the option of putting higher amounts of money and in return get entitled to higher pension amounts. “While this is certainly a positive development, it does not make EPF a better investment option. This is because while currently EPF has a cap on the maximum amount that can be invested, no such limit exists for NPS. Pensions, whether from EPF or from NPS, are taxable anyways. Additionally, NPS investors enjoy a higher tax exemption amount of Rs 2 lakh on investment compared to Rs 1.5 lakh for EPFO,” Kapur adds.
It can, thus, be concluded that for an investor who is well informed and wishes to earn higher than the fixed amount promised by the EPF, NPS is a better option. On the other hand, EPF is better for investors seeking safety and assured returns. Or, you can also invest in both if you so desire!