In a bid to allow individuals to choose between the Employees’ Provident Fund (EPF) and the National Pension System (NPS) as well as facilitate transfer from a recognized provident fund to NPS, the governmet has provided an exemption from taxation to one-time portability from a recognized provident fund to the NPS. Pension regulator PFRDA has through a recent circular also laid down the procedure through which subscribers may shift their corpus from a recognised provident/superannuation fund to NPS.
With these amendments, EPF subscribers would now be able to make a one-time switch to NPS. Within 30 days of applying, the entire balance in the applicant’s EPF account will be transferred to the NPS. Morever, the amount transferred from a recognised PF or superannuation fund to NPS would not be treated as income of the current year and hence would not be taxable. However, the big question is, would it be a wise move to make?
Experts say that both NPS and EPF are excellent products. However, they provide different benefits. In the first place, “NPS comes attached with an annuity clause. At least 40% of the corpus has to be used to purchase an annuity plan, wherein you pay a lump sum to the insurance company and the insurance company provides you an income stream for life. Unlike this, you can withdraw the entire EPF amount at retirement. It is not mandatory to purchase an annuity,” says Adhil Shetty, CEO, BankBazaar.com.
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Then there is the tax angle. NPS is an EET (Exempt-Exempt-Tax – no tax to be paid on the invested amount or returns accumulated, but the corpus is taxable on maturity) product as opposed to EPF which is EEE (Exempt-Exempt-Exempt – no tax to be paid on the invested amount, returns accumulated, or corpus on maturity). Unlike EPF which is 100% tax exempt on retirement, only 40% of the accumulated NPS corpus at retirement is exempt from tax. “At the same time, the returns from the annuity you purchase on retirement is also taxable. Also, if you exit NPS prematurely, you have to use at least 80% of the accumulated corpus to purchase an annuity plan. However, you can withdraw your EPF if you opt for an early retirement, and the amount is tax-free if you have contributed to the EPF account for 5 years,” informs Shetty.
Morever, switching to the NPS would also mean exiting from Employees Deposit Linked Insurance as well as the Employees’ Pension Scheme (EPS). Nevertheless, the employee still has a one-time chance to return to EPF after switching to NPS. This time though, they will be new entrants and will not be eligible for any benefits accumulated in the previous tenure.
So far as NPS is concerned, it allows the contributor to choose the type of asset classes he or she would like to invest in. One can also choose the investment option (auto or active), asset allocation and fund manager, which can’t be done in case of EPF. In case of NPS, the composition of equity and debt is different for different investors. If the contributor does not decide on the proportion on his own, the mix is decided by an automated system based on the age of the contributor.
While someone at an early stage in life has more fund in equities and less in debt, someone older has typically more in debt, as equities are riskier compared to debts. While debt instruments or government securities come with assured returns, returns from equities fluctuate based on multiple economic factors. Equities tend to do better in the long run because a longer tenure balances out the fluctuations in the market.
NPS also allows an additional deduction of Rs 50,000 on the gross taxable income over and above the deduction of Rs 1.5 lakh under Section 80C. Besides, NPS, being equity-linked, can provide much higher returns in the long term than EPF.
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Keeping all these things in view, what should one do? Should one stay invested in EPF as usual or switching to NPS would be a better option?
Experts say that the key here is to have both. “EPF currently provides returns of 8.65%, which is probably the highest from any debt instrument. With regular contribution, EPF can be an excellent long-term debt investment. However, you can supplement it with additional equity-linked investments in NPS, which may provide much higher returns. This will also enable you to save additional tax under Section 80CCD,” says Shetty.
Some experts say that shifting the EPF corpus to NPS may make sense only for young investors with a high-risk appetite as a longer investment horizon may allow them to accumulate a bigger nest egg, while others should invest in both.