To grow their nest fund, most salaried people have access to two broad retirement-specific tools, Employees' Provident Fund (EPF) and National Pension System (NPS) .
The Employees' Provident Fund Organisation acquired 1.11 crore members between March 2021 and February 2022, whereas the National Pension System registered 93.6 lakh for the full FY 2021-22. Even though virtually most firms provide EPF, NPS also provides income-tax advantages. Let us start by understanding the two schemes in brief.
Employees' Provident Fund
The Employees' Provident Fund Organisation (EPFO) administers the EPF retirement benefit scheme. It applies to every business employing 20 or more employees, and it also extends to some organisations, subject to specific restrictions and exclusions, even though they hire less than 20 people.
An employee needs to invest a specified amount to the EPF plan, and the employer must also contribute an equivalent amount. On retirement, the employee receives a lump sum payment that includes both the employee's and the employer's contributions, as well as interest on both.
National Pension System
NPS is a defined contribution retirement savings plan that is open to everybody and requires just a minimum deposit of INR 500 in Tier I and INR 1,000 in Tier II accounts. Under this scheme, individual funds are pooled in a pension fund, which is then invested by PFRDA-regulated professional fund managers in diverse portfolios according to authorised investment criteria.
Subscribers may utilise their built pension wealth under the programme to acquire a life annuity from a PFRDA-accredited Life Insurance Company, as well as withdraw a portion of their collected pension wealth as a lump-sum if they desire.
EPF vs NPS
Period: The legislation requiring employers to furnish provident funds to their employees has been in place for decades. NPS, on the other hand, is a government-sponsored pension-cumulative-investment system that was implemented in the previous decade.
Returns: The annual interest rate established by the government determines the PF returns. The return on NPS, on the other hand, is based on the NAV of the underlining scripts, which might climb or decline. As a result, whereas PF provides security and guaranteed returns, NPS provides both high risk and high rewards.
Flexibility: You may decide how much money you wish to put into stocks in the NPS; the maximum is 75% of your monthly contribution. There is no control over where your money is placed in EPF; the fund can invest between 5% and 15% of its assets in equities.
Risks: NPS earnings are market-linked and hence exposed to certain risks, but EPF returns are guaranteed by the government, making EPF a considerably safer investment option.
Taxability: In NPS, 60 percent of the matured amount may be taken tax-free, whereas EPF is classified as EEE ,therefore the accumulated amount, as well as any interest earned on it, is tax-free.
Withdrawals: Once the subscriber reaches the age of 60, 60 percent of the matured sum can be withdrawn from the NPS. The remaining 40% must be utilised to purchase an annuity by law. PPF, on the other hand, allows employees to take 100% of their matured funds once they reach the age of 58.
The decision between NPS and EPF is based on the taxpayer's knowledge, tolerance for risk, alternatives exercised by the employee, returns, security, lock-in, maturity, and various other factors. Both investments are designed to help you save for retirement.
As a result, early withdrawals are discouraged. That's not harsh, considering both instruments are designed to accumulate over decades to build a fund that you can use into once your ordinary income ceases. Employees who are presently enrolled in the EPF plan can switch to the NPS plan and take advantage of the substantial tax benefits and savings available.