Legal AdviceProvident Fund

Which is Better – EPF or NPS?

You will learn here what EPF and NPS are, what are its benefits and the differences between the two. Which one will be beneficial for you? Know here!

Maximum salaried persons can access two vast retirement instruments to get assisted post-retirement and become financially independent and secure. The specifics are the National Pension System (NPS) and Employees Provident Fund (EPF). From March 2021 to February 2022, the organisation known as EPFO (Employees’ Provident Fund Organisation) gained a subscription of more than 1.11 customers, while for the financial year 2021-22, the NPS registered 93.6 lakh customers. Every company having more than 20 employees offers EPF, but there are also various benefits of income tax that NPS offers. Now the query is which one is best? 

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The NPS and EPF work to benefit the employees and aim to save some amount which will be helpful for the employee post-retirement. So, both hinder early and premature withdrawals. Both investments are meant to provide some help at the time when your regular income gets stopped. So that is not a bad thing. Then, where the difference lies? 

The big difference is that EPF is described as a benefit plan or scheme, where intensity is on the EPF, and returns are made up by EPF annually. The government of India guarantees the EPF return. So, when you cross your retirement age, preferably 58 years, you will get a handsome amount. 

In contrast, NPS is described as a contribution plan, where your capital gets deployed in debt markets and equity. The impression is that your monthly standardised contributions compound at market rates, adequate to pay you a legal and hopefully good pension after your retirement. EPF is a worker benefit scheme, and only a salaried person will get the benefits of EPF, whereas any person in any business or work structure can go for NPS to save some amount for the post-retirement. 

Click here to know about: EPFO Member Registration

Are There Any Significant Differences Between EPF and NPS? 

Here are the PF and NPS difference

The main difference between the two is that the EPF gives you guaranteed tax-free returns in the shape of annual interest on the deposited amount in the account of EPF. At the same time, NPS provides market-attached returns. The EPF interest rate is governed by the Government of India, whereas for the National Pension Scheme, the return depends on market volatility. The EPF gives you a tax deduction of up to 1.5 lakh rupees under the section 80c of the Income tax act, whereas NPS offers full tax benefits of up to 2 lakh rupees under the sections 80CCD (2) and 80CCD (1).  

Another critical difference is that the EPF is only accessible by salaried employees labouring in various private companies. In contrast, NPS can be opted for by any Indian inhabitant, even self-employed persons of 18 to 60 years of age. In the case of EPF, 12% of the employee’s basic salary is deducted from the EPF contribution, which is not mandatory in NPS. NPS is voluntary based, and NPS investors can contribute either a handsome or small amount towards the NPS contribution.
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Minimum Investment Amount

The lowest amount you have to invest in a particular financial year is ₹6000 for an NPS account with no upper threshold. For EPF, the amount is fixed as 12% of the employee’s basic salary monthly. However, if employees want to add more to their EPF account, they are free to do so. Moreover, the total amount sum can be taken out from the account of EPF on maturity, whereas 40% of the matured sum is required to be invested in allowances in the NPS case.  

NPS Offers You a Bit More Flexibility.

It permits you to select the amount you want to keep in equities. The maximum amount you can contribute to NPS is 75% of your monthly income. In EPF, there is no custody on where your capital gets donated, and the account can invest from 5 to 15% of the total corpus in the capital. As per the founder of Plantrich Consultancy LLP, Khyati Mashru Vasani, wherever possible, we motivate our customers to invest in both schemes. The purpose of these investments is different as EPF guarantees a better income for post-retirement expenses, whereas NPS works well in scheming for good expenses. 

The NPS retirement calculator helps you decide how much money you need to save to have an relaxing retirement.

Also, there are tax benefits for both NPS and EPF. From both schemes, you can get a concession of taxable income of up to 1.5 lakh rupees under Section 80C of the Income Tax Act for the sum invested. In the case of NPS, you can get a benefit of extra 50,000 rupees worth of deduction under section 80CCD (1B). As per Vasani, the customers who choose NPS preferably get more benefits if tax as there is no contribution barrier. It can be valuable to invest high amounts by being sure of a retirement plan. You can take out 60% of the NPS budget at maturity. In EPF, the maturity earnings are tax-free; however, earned interest on yearly contributions will be taxable if the amount is more than ₹2.5 lakh. 

What Suffers From NPS and EPF?

EPF suffers from a few noticeable drawbacks. It doesn’t give you a choice to opt for your capital investments, even if you are ready for a more equity allowance. The interest rates of EPF have also decreased in past years. The interest rate for EPF is 8.10% for the financial year 2021-22. However, the interest rate was 11% in FY 2011-12. It is problematic or worrisome for individuals who will join any job this year or in the future. Also, not everyone can contribute to EPF. This option is available only for those who are employees and working in a good organisation. This option is not available for small business persons and professionals; the only option NPS is available for such persons and businesses. Furthermore, the NPS is based on the market link. It can be risky in a short period. But NPS will be proven helpful for a long period, as a high capital allowance of up to 75% knocks inflation over the longer period.  

One more problem with the National Pension Scheme is that you can not take out your full corpus on your retirement. You are allowed to withdraw only 60% of your collected corpus. The rest, 40% compulsory, gets capitalised in an annuity. The income from unity is liable to tax at your income tax rates.  According to the principal officer of GYR Financial Planners Private Limited, Rohit Shah, NPS is a commodity with fewer charges, and one can opt for up to 75% allowance to the equity that can deliver potentially higher longer period returns. But the annuity liable to tax can be a hindrance after retirement, specifically given that other creative options such as investment in long-term mutual funds are accessible.  

Click here to more about Download Form 15G for PF Withdrawal 2022

What Should You Do?

The higher allowance to equity by NPS is beneficial for getting a post-retirement kitty, and the advantages get diluted due to a necessary annuity and tax on that fraction. Suppose you are a decade or two away from retirement. In that case, it will be good for you to know the things related to annuity and get the information regarding whether or not you want a pre-deduced annuity. It will be good for you to take the whole corpus at maturity time and then structure the annuity according to your needs. This can be a more related assessment of your retirement amount. 

As per the Founder Director, Finsafe India Private Limited, Marin Agarwal, EPF is mandatory for employees. The awareness of NPS among professionals, small business owners and others is not high. Delayed annuity schemes from various insurance companies are chosen, perhaps only due to the noticeable earnings that they are offered every month.  

At 8.1% tax-free earning, EPF may be more attractive than other investment options, and the guarantee given by the Indian government provides it with an edge over other options. But NPS has its benefits, but it contends with market-linked insurance schemes and mutual funds that provide the same benefits and do similar things. 

However, for the disciplines offered by both investments, with some income tax advantages thrown in, most professionals say that NPS works efficiently to fulfil your retirement expenses. But, if you are investing monthly, disciplined, diligently conserving for your post-retirement, and do not need to withdraw the amount prematurely, solid well-regulated equity funds will be beneficial in your favour. 

Conclusion

Every individual is thinking about post-retirement expenses. For the salaried person, two types of investment are there, I.e., NPS and EPF, to take care of the expenses post-retirement. But which one will you choose? It all depends on you. If you are ready to contribute 12 % of your basic salary towards your account and do not have any hurry to withdraw your money prematurely, you can opt for EPF. NPS has its advantages. You can voluntarily contribute your contribution to your account. However, if you need suggestions regarding which one will be best suited for you, Vakilsearch is here for your assistance. It will answer your queries and will solve all your problems.

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