PENSION Fund Regulatory and Development Authority (PFRDA) had recently issued a circular detailing the process for transfer of fund balance from Employees’ Provident Fund (EPF) to National Pension System (NPS). This circular gives effect to a proposal made by finance minister Arun Jaitley in his 2015 Budget speech allowing employees to opt for either EPF or NPS.
Active Tier 1 account
Employees interested in getting their EPF funds transferred to NPS should have an active Tier 1 NPS account. The employees are required to approach the EPF through their current employer and request for transfer of fund balance from EPF to NPS account. The fund balance so transferred from EPF to NPS will not be treated as income of the current year in the hands of employees. Also, the transferred amount will not be treated as contribution to NPS of the current year by the employee / employer and will not be eligible for deduction under Section 80CCD of the Act.
Transfer still not possible
Although PFRDA has laid out the transfer process, many are doubtful whether the transfer will be possible as the EPF authorities have not notified anything as yet. As per the EPF Scheme, there are specific circumstances when EPF withdrawal is possible such as retirement on attaining 55 years of age, permanent and total disability, migration from India, etc. Withdrawal from EPF for transfer of fund balance to NPS is currently not possible. Thus, to implement the finance minister’s proposal, changes may be required in the EPF Scheme.
EPF invests its funds in government securities, bonds, debt securities and only a small portion in equity instrument. EPF accrues annual interest on the fund balance at notified rate for each year. In the last three years, the rate has ranged from 8.75% to 8.80%. NPS does not offer any guaranteed return to its subscribers. As per the FY16 Annual Report of NPS Trust, since inception the return offered under its various schemes has ranged from 7.86% to 14.30%.
If an employee terminates employment and does not take up another employment within two months with an employer who is registered under EPF, entire fund balance in EPF can be withdrawn in lump-sum. This provides easy liquidity to an individual who may want to use the EPF funds for starting a business venture or to fulfil other needs. In NPS, an employee who is over 60 years can withdraw maximum 60% of fund balance in lump-sum and the rest goes to an annuity plan for monthly pension.
While withdrawal from EPF is fully tax-free provided the employee has rendered continuous services for five years or more, lump-sum withdrawal from NPS is tax-free only up to 40% of the total corpus. For employees, EPF has been the most favoured retirement savings scheme. NPS is yet to gain popularity among employees. Both schemes have their pros and cons and the decision to opt for either is going to be a tough one for many.