Here are some key points for consideration while deciding between NPS and EPF as a retirement saving option.
Today, looking at the variety of investment options, investors are spoiled for choice. The National Pension System (NPS) and the Employees’ Provident Fund (EPF) are the two most common investment alternatives for employees that provide dual advantage of tax saving as well as good returns.
Here are some key points for consideration while deciding between NPS and EPF.
Contributions to EPF
Provident Fund law has been present for several decades and is mandated to be offered by an employer to its employees. It is necessary for an establishment employing more than 20 employees to contribute towards EPF for employees with basic salary less than INR 15,000 p.m. Employees drawing basic salary more than this threshold can also opt to contribute.
The investment in PF is monitored through a set of rules that ensure security as well as steady income.
EPF contributions can be done by all irrespective of the nationality of the employee. Minimum contribution to EPF is at 12% of PF salary which is the aggregate of basic salary, dearness allowance, cash value of food concession and retaining allowance. The contributions can be restricted to INR 1,800 p.m. (12% of INR 15,000) at the option of the employee. The employee may also contribute 100% of his/her basic salary as a voluntary contribution to the EPF.
EPF would soon be subsumed into the Code on Social Security which not only provides coverage to a wider population but going forward, may also lead to contributions to the EPF on a higher amount of wages.
Contributions to NPS
NPS on the other hand has been introduced in the last decade and is a pension-cum-investment scheme launched by the Government of India. Indian nationals and Overseas citizens of India card holders can invest in NPS.
NPS is a voluntary contribution scheme with only a minimum contribution of INR 500 in Tier I and INR 1,000 in Tier II accounts. There is a choice of equity, corporate debt and government bonds depending on the risk preference of the investor. An individual could be a member of NPS through his employer or join as an independent member and participate in the scheme.
A quick summary of tax implications / tax deductions available to individuals:
It may also be noted that the aggregate employer’s contribution to EPF, NPS and superannuation fund in excess of INR 7,50,000 is taxable in the hands of the employee.
Proposed changes in the Budget
It is proposed in the Finance Bill 2021 that employee’s contribution to PF in excess of INR 2,50,000 per year would generate taxable returns. This would primarily impact high earning employees who are contributing on a higher basic salary or having voluntary contributions. Fortunately, the common man would not be impacted by this change and hence for him EPF still is an attractive option.
Returns and pension
The returns under PF are fixed with the interest rate announced by the government annually. However, the return on NPS is dependent on the NAV of the underline scripts which may rise or fall. Thus, while PF offers security and assured returns, NPS offers high risk and high returns. Thus, for the common man both options offer tax advantages and good returns.
The choice between NPS and EPF depends on the knowledge of the taxpayer, risk appetite of the employee, options exercised by the employee, the returns, security, lock-in, liquidity, maturity etc.
(By Aarti Raote, Partner, Deloitte India, with Anandan N, Manager, and Vrrithi Aggarwal, Assistant Manager, Deloitte Haskins & Sells LLP)