EPF vs NPS: Which is a better option?

Retirement planning is important for financial security at old age. As most of the employees in the private sector often face uncertainties over their job stability, a little planning for retirement could be helpful to avoid financial crisis after retirement.  Among the available investment options in the market, the Employees Provident Fund (EPF) and National Pension System (NPS), are two of the most preferred retirement savings schemes.

Notably, employees who are covered under the EPF also have the option to subscribe to the NPS scheme. As NPS is a voluntary retirement savings scheme, anyone can make a contribution of a fixed amount every month to build a retirement fund.

Both the government backed schemes come with a few advantages and limitations. It’s important to know various factors like interest rate, eligibility investment period and benefits before deciding to invest.

What is the Employees Provident Fund?

Managed by the Employees’ Provident Fund Organisation (EPFO), the Employees’ Provident Fund is one of the most promising retirement benefits schemes that help employees to build a corpus fund for post-retirement life. Under this scheme, both employee and the employer make equal contributions on a monthly basis. The accumulated amount along with an interest can be withdrawn by the employee after retirement.

What is the National Pension System?

The National Pension System is a long-term voluntary contribution plan meant for employees from private, public, and even the organised sectors. The scheme has been designed to encourage individuals to invest in a pension account at regular intervals throughout their employment tenure. After reaching the retirement age of 60 years, the investor can withdraw a part of the corpus fund in lump sum and the remaining amount will be paid out as annuity.

Employees Provident Fund vs National Pension System 

1. NPS is a voluntary contribution while every organisation with more than 20 employees is mandated to be covered under the EPF scheme, as per the EPFO guidelines.

2. NPS is managed by the Pension Fund Regulatory and Development Authority (PFRDA). A majority of the fund is invested in a diversified portfolio of market-linked assets. On the other hand, EPFO regulates the EPF scheme and a mandatory contribution is made by the employee and the employer every month.

3. EPFO decides the interest rate for every financial year for EPF contributions and the interest amount is credited to the account annually. Currently, the EPF interest rate stands at 8.15 per cent annually. NPS being a market-linked scheme, the interest rates could vary. As per the trends in recent years, NPS offers 9 to 12 per cent return on investments.  

4. In the case of NPS, investors cannot withdraw their funds until the age of 60, however, they are allowed partial withdrawals only if they invest 80 per cent of their funds in an annuity scheme. On the other hand, withdrawals are allowed in EPF under certain circumstances. An employee, if remains unemployed for two months or more, can withdraw the entire EPF amount.

5. Employee’s contributions of up to Rs 1.5 lakh towards EPF is tax-free under Section 80C of the Income Tax Act, 1961. The entire amount contributed by the employer is also tax free. NPS contribution of up to Rs 50,000 could be claimed as tax exemption under Section 80 CCD

6. EPF is open to only salaried employees while NPS accounts can be opened by any Indian citizen between 18 and 60 years of age.

With the two retirement savings options available in the market, investors can compare the benefits and drawbacks of EPF and NPS before making a decision. An investor can even open an NPS account alongside the EPF investments.