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Executive Summary – Employee Provident Fund (EPF) was the standard option for people to invest for retirement. National Pension Scheme (NPS) is a new investment avenue where there is potential for higher returns as it can be linked to different investment instruments. Here is what you should consider before deciding which one to choose.
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In the recent budget, it is proposed to let Employees choose if they would like to divert the Provident Fund contribution to NPS. Here are few aspects you can consider while you make that decision.
What to consider?Who can invest?
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EPFOnly salaried persons can open an EPF account. It is compulsory for employees with salary greater than Rs.15,000 per month to contribute towards EPF. The employee can contribute 12% or more of Basic +DA. The employer has to contribute 12% only. There is no age limit for a person to open an account.
If an employee is 58 years or more, it is optional for him/her to contribute to EPF. If the employee’s (Basic salary + Dearness Allowance)> 15000, it is optional for him/her to contribute to EPF. |
NPSAnyone between the age of 18-60 years can invest in NPS. NRIs can also invest in NPS. People drawing a salary and people self-employed people can open an NPS account.
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Features
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It is mandatory to invest the fixed amount in EPF every month. The amount in EPF is invested mostly in Government bonds, Debt Funds and PUs deposits.
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A person has to invest a minimum of Rs. 6,000 and there is a ceiling on maximum amount at Rs. 2,00,000 per year. The amount can be paid in any frequency as long as there is a minimum amount of Rs. 6,000 and at least 1 transaction. The money is invested in Equity, Debt and Government securities as per his/her age. One can tweak the portfolio to change the allocation in the different funds.
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Tax Treatment
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The amount contributed towards EPF is deductible under Section 80C. A maximum of Rs. 1,50,000 is allowed.
The interest earned is not taxable. The total amount received at the time of maturity is tax-free. If the EPF amount is withdrawn within 5 years of opening the account, the amount is taxable. |
10% of the amount contributed towards NPS qualifies for deduction up to Rs. 1,50,000 under Section 80CCD.
From 2015 Budget, another Rs. 50,000 is allowed as a deduction. |
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Liquidity
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An employee can withdraw money invested in EPF before maturity when a person switches jobs and stays without the job for at least 2 months. If certain conditions are fulfilled, one can withdraw for marriage, medical treatment or to pay off home loan.
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In case of NPS, 80% of money withdrawn before one becomes 60 years old should be used to buy annuity for monthly pension.
If the amount is withdrawn after the age of 60, 40% of it should be used to buy annuity and the rest can be deployed as per the person’s wish. |
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Returns
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Currently the interest rate is 8.75%. This is decided annually.
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The returns are market linked and depend on the asset allocation and the fund performance.
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Comments
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EPF has the advantage of getting additional money from the employer. The returns are fixed. Liquidity is better in EPF.
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NPS gives higher returns and gives the flexibility of having an asset allocation that you want which includes equity exposure as well.
The employer contribution to the employee’s NPS account is optional. |
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