EPF and NPS: Two retirement funds you should know better

The CBDT allowed EPFO to invest in equity markets from august last year. As an aside, EPFO earned a negative return of 9.54 per cent on its ETF investments of Rs 5,920 crore since then.

Mar 16, 2016 05:03 IST India Infoline News Service

The unarguably positive news for the great Indian middle class – government’s roll back of the controversial Employee Provident Fund (EPF) withdrawal tax proposed in the 2016 budget – is the perfect backdrop to weigh the pros and cons of the hugely popular EPF and the fast mushrooming National Pension Scheme (NPS), especially if you had little idea of the two despite their ubiquity across every form of media almost every single day.
 
Here’s a at a glance comparison for faster comprehension:  
 
EPF NPS
Know What   Keyword: Mandatory

Governed by Employees’ Provident Fund Organization to help organised sector employees build post-retirement financial security

Mandatory for employees with basic salary up to Rs. 15,000

Optional for employees with basic salary above Rs. 15,000

Scheme runs till retirement or till employee opts out of it, account is transferable from one employer to another in case employee joins another

Employee can nominate one or more family members – in case of no family, employee can nominate person of choice but on acquiring family after that, the earlier nomination would be rendered invalid and a fresh nomination of family member would have to be made.

EPF investments are made in government securities and government-owned corporate bonds.

The CBDT allowed EPFO to invest in equity markets from august last year. As an aside, EPFO earned a negative return of 9.54 per cent on its ETF investments of Rs 5,920 crore since then.
Keyword: Voluntary

Governed by Pension Fund Regulatory and Development Authority for all citizens aged 18 and above but below 60 years. Scheme maturity is 60 years.

One can enrol for the scheme at authorised Points of Presence (POP), private and public sector banks and many financial institutions.

Transferable within geographies and between POPs

Tier-1 (limited withdrawable pension account with substantial tax benefits) minimum contribution Rs 500 aggregating Rs. 6,000 per year.

Tier-II (unlimited withdrawal saving & investment account with no tax benefit) minimum annual contribution Rs 2000. No cap on maximum investment.

On retirement, while a subscriber can opt out of NPS, he/she must invest minimum 40 per cent of accumulated savings in life annuities.

In the event of subscriber’s death, the nominee receives 100 per cent of the NPS pension fund.
Know How  Employee contributes 12 per cent of basic salary and employer contributes equal amount (employer contributes 12 per cent for all employees, even those who have not opted for EPF)

The employer’s component is split into EPF (3.67%) and the Employees’ Pension Scheme (8.33%)

The return on EPF is decided by the government every year.

Ensures good returns (8.8 per cent for 2015-16)

Loans & withdrawals allowed for medical emergencies and occasions/needs like marriage, children’s education/house construction subject to conditions:
  • For events other than medical emergencies & house construction:
  • Minimum service span 7 years (exempt for medical emergencies)
  • Maximum 3 withdrawals
  • Maximum aggregate withdrawal 50% of total employee contribution
For medical emergencies
  • No minimum service period stipulation
  • Maximum withdrawal 6 times basic salary
  • Proof of hospitalisation mandatory
For house construction


  • Available once in employee’s work tenure
  • Minimum service span 5 years
  • Maximum withdrawable amount 36 times total salary for property construction and 24 times total salary for property purchase
Subscriber has two investment choices :

Active choice - Individual Funds (E, C and G Asset classes) 
Subscriber will have the option to actively decide as to how your NPS pension wealth is to be invested in the following three options:

- "High return, High risk" - investments mainly in equity instruments

- "Medium return, Medium risk" - investments mainly in fixed income instruments

- "Low return, Low risk" - investments purely in fixed income instruments.

Subscriber can invest entire pension wealth in C or G asset classes up to a maximum of 50% in equity (Asset class E). One can also allocate funds across E, C and G asset classes, subject to PFRDA stipulations.

Subscriber needs to mandatorily convey Pension chosen Fund from among the seven PFRDA-appointed Pension Fund Managers.

Auto choice - Lifecycle Fund

This is for those unsure or incapable of managing NPS investments on their own. Also, this is the default option if subscriber fails to exercise any choice.

Investments are made into a life-cycle fund and fraction of funds invested across three asset classes is determined by a pre-defined portfolio.

At the lowest entry age (18 years), auto choice entails investment of 50% of pension funds in "E" Class, 30% in "C" Class and 20% in "G" Class.

These ratios of investment remains fixed for all contributions until the participant turns 36.
From age 36 onwards, the weight in "E" and "C" asset class decreases annually and the weight in "G" class increases annually till it reaches 10% in "E", 10% in "C" and 80% in "G" class at age 55.

Subscriber must mandatorily choose one PFM under auto choice.
Know Why  
Exempt, Exempt, Exempt (EEE) 
This means you won’t have pay tax on all three instances:
  • 1.On your contribution ( part of the salary that equals the invested amount), 
  • 2.On returns earned on accumulation
  • 3.On income at the time of withdrawal/ maturity
 
Exempt, Exempt, Taxed  (EET) This means both contribution and accumulation are exempt from tax but withdrawal is taxed as per given slabs.

Tier I Salaried Individuals

Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C

Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961

Up to 40% lump sum Corpus withdrawals and balance amount invested in Annuity fully exempt from tax

Pension from investment in Annuity treated as income and taxed appropriately

Tier I Self-employed Professionals

Investment up to 10% of Gross Annual Income is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961
subject to 1.5 lakhs limit of section 80C

Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961

Tier II Subscribers

No tax benefit on investment but Indexation benefit can be claimed

2016 Budget has proposed to exempt 40% of retirement corpus as also annuity payment to the legal heir on pensioner’s death. 

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