Awareness regarding retirement planning is on the rise in urban India as more individuals are recognizing the importance of starting early. For those seeking to maximise their returns, transferring funds from an Employee Provident Fund (EPF) account to a National Pension System (NPS) account could prove to be a game-changing decision.
While transferring funds from EPF to NPS is feasible, there are specific steps that need to be followed. A one-time transfer of your EPF savings to an NPS Tier 1 account is exempt from taxes under Section 10(12), as it is not considered a contribution to NPS for that particular year.
To initiate the transfer, you must have an active NPS Tier 1 account. You can complete the process through your employer, directly through a Point of Presence (POP), or through the eNPS portal.
To initiate a transfer request, please submit it to your employer for processing with the recognized EPF office. The funds will subsequently be deposited into your NPS account. It is important to note that this transition cannot be reversed, hence careful evaluation is crucial before proceeding.
EPS vs NPS
According to a Value Research analysis, the National Pension Scheme (NPS) is recommended as the top choice for retirement planning, as it has the potential to generate a larger corpus compared to the Employees' Provident Fund (EPF). For example, with a monthly investment of Rs 10,000 since May 2009, an EPF would have yielded Rs 35.1 lakh, whereas an average NPS could have accumulated between Rs 40.3 lakh (with a 25% equity allocation) and Rs 51.2 lakh (75% equity allocation). This means that the NPS could have helped individuals save approximately 15 to 46% more for their retirement. The difference in returns between the two options is significant.
Should you make the switch?
One should note that the performance of NPS is correlated with the market and varies based on your allocation among equity, government securities, and fixed-income options. In the long run, NPS has the potential to provide higher returns compared to EPF, which offers lower but steadier returns.
"Transfer of funds from the EPF account to NPS Tier-1 account is permitted as per the procedure outlined by PFRDA in its circular dated 6th March 2017. To do this, first, open an NPS Tier-1 account. Then, submit the transfer request form to your employer. Your employer will take care of transferring the funds from your EPF account to your NPS account. Transfer of funds from EPF to NPS can be done only once and will be tax exempt. The amount transferred from EPF to NPS will not be considered as withdrawal, so no tax will be charged on it. However, you cannot claim any tax deduction under Section 80CCD for the EPF amount transferred to NPS. Keep in mind that NPS is linked to the market, and the returns depend on how you choose to allocate your funds between equity, government securities, and fixed-income options. Over the long term, NPS has the potential to offer higher returns compared to EPF, which provides lower but more stable returns," said Kinjal Shah, Secretary BCAS.
The decision to transfer EPF funds to NPS depends on factors such as financial goals, asset allocation, and risk tolerance. Here are some key considerations to keep in mind:
Equity exposure: If you currently have limited exposure to equity investments, transferring funds to NPS can help in diversifying your portfolio. NPS options: The 'active' NPS option allows for up to 75% equity allocation until age 50, with a gradual reduction as you approach retirement. On the other hand, the 'auto' option restricts equity allocation, especially for individuals nearing retirement. Accessibility of funds: EPF offers more flexibility as the entire corpus can be accessed tax-free upon retirement. In contrast, NPS requires 40% of the corpus to be reinvested in an annuity, with the income being subject to tax. In NPS Tier 1, the interest earned is exempt from taxes. However, only 60% of the corpus is tax-free upon maturity, with the remaining 40% of annuity income being subject to taxation.
"Transferring funds from your EPFO to NPS is a strategic move for retirement planning. It’s a one-time, tax-exempt transfer under Section 10(12), with no tax deduction benefits for the year of transfer. For those with minimal or no equity investments, this transfer can enhance your retirement corpus and provide valuable diversification. Ensure you have an active NPS Tier 1 account and complete the process via your employer to secure a financially stable future," said Sudhir Kaushik, Co-Founder & CEO of Taxspanner (Subsidiary of Zaggle).
Advantages of NPS
Moving funds from EPF to NPS has the potential to enhance earnings, especially for individuals keen on equity investments. However, it is essential to ensure that this shift aligns with your financial goals, liquidity needs, and risk tolerance.
By opting for NPS, you can avail of an additional deduction of Rs 50,000 from your taxable income. This is on top of the Rs 1.5 lakh deduction already available for both EPF and NPS.
Furthermore, in NPS, you have the flexibility to choose your fund manager and asset allocation. Unlike EPF, you can allocate up to 75 per cent of your funds to equities, which can offer superior returns over the long term.
Additionally, you can maintain your NPS account with a minimum annual contribution of Rs 1,000, while EPF requires a contribution of 12 per cent of your basic salary.