The debate has been going on since long with respect to whether Employee Provident Fund (EPF) is suitable for the purposes of retirement planning or National Pension Scheme (NPS) is more suitable. Even while both the schemes serve towards retirement planning for the subscribers, the DNA of both the schemes is indeed different. Here’s a sneak peak of how these schemes differ.
Category of Subscribers
EPF account is opened by the salaried employees through their employers wherein the monthly contributions are deposited through monthly deductions in respect of employee’s contributions and by the employer in respect of employer’s contributions. Non-salaried persons cannot voluntarily open an EPF account to plan for their retirement. On the other hand, NPS account can be opened by any category of individuals, whether salaried or not. As such, the category of persons eligible to invest in NPS is much larger as compared to EPF.
Instruments to be Invested in
Being a social security scheme, EPF hads been historically dominated by debt investments in order to ensure least volatility and more specifically ensuring positive returns for their subscribers. However, in the recent past, EPF has been investing a part of contributions received during the period intoo equity markets.
On the other hand, the subscribers to NPS are free to decide their asset allocations in equity, government bonds and corporate bonds. That can be set to be adjusted automatically depending upon the subscriber’s age or can be decided by the subscriber as well.
Type of Returns
Returns are assured to EPF subscribers and the rate of interest is decided by the trustees of the fund every year depending upon the returns earned by the fund through its investments. The rate of interest declared for FY 2016-17 was 8.65 per cent. On the other hand, since the asset allocation in NPS corpus is decided by each subscriber individually, the return varies as per the asset allocation decided. Given the higher permitted asset allocation under NPS, the returns can tend to be higher than EPF since equities tend to perform well over longer term.
Tax Benefits upon Contribution
As per the current provisions of Income Tax Act, 1961, EPF contributions are deductible from income upto a maximum of Rs. 1.50 lac. However, this section also makes other payment eligible for deduction like payment of life insurance premium, repayment of housing loan etc. As such, the maximum tax benefit one can avail of from EPF contributions can be further curtailed.
On the other hand, voluntary contributions to NPS are being offered additional deduction u/s 80CCD(1B) upto a maximum of Rs. 50,000, besides also being eligible under the umbrella limit of Rs. 1.50 lakh.
Taxability on Maturity
Upon maturity, the entire EPF corpus is exempt from taxation and can be withdrawn by the subscriber. On the other hand, in case of NPS, up to 40 per cent of corpus may be withdrawn without paying any tax. Further, a minimum of 40 per cent needs to be compulsorily invested in buying an annuity/ pension plan.
As such, it may be seen that both EPS and NPS come with their benefits and constraints. However, in order to have a healthy retirement corpus, one must indeed consider getting a mix of both in their journey to a great life ater retirement.