National Pension Scheme vs. Employee Provident Fund

 

It is important to first understand that NPS (National Pension Scheme) and EPS (Employee Provident Fund) are as different as chalk and cheese. Although both cater to the post retirement needs of a person, the tax benefits, rate on investment, etc. are very different.

In order to understand what exactly makes NPS different from EPS, it is important to get a clear and broader understanding of the benefits and shortfalls of both and which one supersedes the other.

What is NPS?

Just like the commonly known Employee Provident Fund, the National Pension Scheme too is a retirement plan, which is open to all the Indian citizens. It caters not only to employees of organizations but also to the wage workers and is available in 3 forms:

1) Tier I – wherein premature withdrawal is not allowed. The holding is up to retirement.
2) Tier II – Premature withdrawal is permitted in case of genuine reasons.
3) Swavalamban account – Here the government shall pay Rs. 1,000 for 4 years into the account as its contribution. The main objective of this account is to encourage savings among the wage earning category.

What is EPF?

An Employee Provident Fund is specifically for the salaried. It is a dear scheme that covers majority of the working class. Here the employee and employer both contribute 12% + Dearness Allowance each into the EPF account.

Thus, while an NPS account can be opened by any Indian, an EPF account is available only to a salaried person.

Return on Investment

As mentioned before both are retirement plans, however the return on investment which can be earned by the two differs greatly. The EPF interest rate for the year 2014-15 was 8.75%.

However, in case of NPS there is no specific interest rate as NPS is a market-linked product. The money is not with the government but with designated fund managers, which you can choose between. You can also choose between different funds as investment options, some of which invest in fixed income but others invest in equities. Up to 50% of your assets can be in equities. Equity investments are the great advantage that the NPS has. While equity investments can be volatile over the long horizons of a typical NPS investment, they are likely to generate much higher returns than fixed income securities.

Can you take a loan of any of these?

In case of EPF, an application for loan to a maximum extent is allowed thus making EPF nearly liquid. However NPS offers no such option so it is literally a long term holding with no exit route.

Perks of planning for retirement

For EPS your employer is obligated to match up to your 12% + DA contribution and this gets added to your retirement savings. So you save twice by saving once. Unfortunately for NPS there is no such obligation on the employer to contribute.

What about Tax?

EPF – Tax deduction is available Up to Rs.1 lakh under section 80C and taxable as per applicable tax slab if withdrawn before 5 years of service.

NPS – Section 80CCD of income tax act provides deduction under the section 80CCD(1) in respect of contribution made by the employee, and a deduction under the section 80CCD(2) in respect of contribution made by the employer to the New Pension System (NPS).

Contribution made to the pension scheme under section 80CCD (2) (employer’s contribution) shall be excluded from the limit of one lakh rupees provided under section 80CCE.

So, if you’re genuinely looking for retirement saving, then keeping the tax dimension aside, NPS is far better structured and should deliver more satisfying returns because it is designed as a very methodical retirement savings plan, whereas EPF is something to channelize long-term savings into safe fixed income.