NPS vs EPF: Which one should you go for?

The Pension Fund Regulator recently released the process of how a person can transfer the money from Employees Provident Fund (EPF) to National Pension System (NPS). In last year's budget the Finance Minister allowed one-time tax free withdrawal from EPF and superannuation fund to be transferred to NPS. The money so transferred will not be considered the income of the year, hence will not be taxed. Also, the employee will not be able to claim tax benefit on the transferred amount to NPS.

To transfer the money from EPF to NPS, the employee must have a NPS Tier 1 account. NPS has two types of account Tier 1 and Tier 2. Tier 1 is the compulsory account and is mandatory for opening Tier 2 account. You can't withdraw from NPS Tier 1 account before retirement while in case of Tier 2 account  there are no restriction on withdrawal.

The employee will have to go through the employer to transfer the EPF or superannuation to NPS account. The recognised PF or superannuation fund will then initiate transfer.

Although PFRDA has laid out the process, many are sceptical whether the transfer will be possible as EPF has not notified anything yet.

Even if it was notified should you transfer money from EPF to NPS?

To find out the answer to this question, we will need to first do the comparison between EPF and NPS on various parameters.

NPS is a voluntary defined contribution retirement savings scheme which provide a retirement savings option for even those employed in the unorganised sector while EPF is for those employed in the organised sector. Apart from this there are some other differences between the two that one should look at.

Asset allocation: EPF is a predominantly debt instrument as majority of its investments goes  into debt.  The equity allocation in case of EPF has been increased to 10 per cent recently while earlier it was five per cent only. There is cap of 15 per cent on the equity allocation.

The NPS has three plans- equity, government bond and corporate debt. In case of equity option, the equity allocation can go up to 50 per cent.

Returns: The Central Board of Trustees of EPFO declares the interest rate to be paid on EPF for the year. EPF is currently offering an interest rate of  8.65 per cent. While NPS is a market-linked product.

The Tier 1 equity plan has delivered a return of 26 per cent over the past one year while the government bond option has delivered a return of around 13 per cent.  The corporate bond plan has delivered a return of 12 per cent over the past one year.

Amount of investment: In case of EPF, employee has to contribute 12 per cent of the salary including dearness allowance towards EPF while in case of NPS a minimum contribution of Rs 6,000 a year is required while there is no upper cap.

Tax benefit: You can claim three types of deduction against NPS investments. You can claim a deduction of up to Rs 1.5 lakh under Section 80C. Apart from this, an additional deduction of Rs 50,000 is allowed under Section 80CCD (1B). This is over and above what you can claim under Section 80C. An employee is also allowed to claim deduction against the contribution made by the employer of up to 10 per cent of the salary (basic salary plus dearness allowance) in the NPS under Section 80CCD(2). There is no limit on this deduction. However, the returns earned on NPS are not taxed but there is tax on 40 per cent of the withdrawal amount.

EPF falls under EEE tax regime. The investments in EPF are eligible for tax deduction of up to Rs 1.5 lakh under Section 80C.  Both the interest as well as accumulation are tax free.

Mode of investment: In case of EPF amount is automatically deducted from salary while in case of NPS the subscriber will have invest lump sum or in instalments on their own.

Withdrawal: One can withdraw the entire accumulation from EPF at the time of retirement at the age of 60 while in case of NPS, 40 per cent of the accumulation have to be compulsorily invested in annuity.

Should you switch from EPF to NPS

Experts believe that EPF and NPS are not the alternatives for each other rather they should complement each other.

One should have both a EPF and NPS account as both of them serve a different purpose of guaranteed return and market return.  

"According to the risk profile/age, interest rates and taxation - all of them change continuously - should one make the decision.  Market related volatility and returns are not suitable for everyone and the more conservative investors should continue with the EPF," says Manoj Nagpal, CEO, Outlook Asia Capital.

"EPF is considered to be a pure retirement planning solution, whereas NPS offer retirement planning and regular pension solution as well. Young Subscriber under 40 years of age should use NPS as the main vehicle for wealth creation and retirement planning as well as for pension planning. This category has a long time horizon and hence they can opt for high allocation towards equity in their NPS Plan. Subscribers above 40 years of age should divide their retirement corpus between EPF and NPS in the ratio of 50:50," Anil Chopra- Group CEO & Director, Bajaj Capital.