[Analysis] EPF vs. NPS Comparison | Find the Best Retirement Savings Plan

The comparison between EPF and NPS highlights key differences: EPF is a government-managed, mandatory scheme with fixed returns (8%-8.5%), low risk, and partial withdrawals allowed for specific purposes; it's tax-free on retirement after five years. NPS is a voluntary, flexible scheme regulated by PFRDA that offers market-linked returns, higher risk, and partial withdrawals after three years; it provides tax benefits on contributions, with 60% of the corpus tax-free at exit. EPF suits those preferring stability, while NPS is ideal for higher-risk appetites and growth potential.

By CA Naveen Wadhwa – Vice President & Sagar Phukela – Associate | Taxmann’s Advisory & Research

Table of Contents

1. Introduction
2. EPF v. NPS
3. Partial withdrawal
4. Maturity and Pre-Maturity Exit
5. Pension
6. Risk
7. Returns
8. Tax on Contribution
9. Tax on Accretion
10. Tax on Withdrawal
11. Return Comparison
12. Conclusion

1. Introduction

Employee Provident Fund (EPF) and National Pension Scheme (NPS) are essential retirement savings tools for employees that help them build a tax-efficient retirement corpus. These two schemes focus on one objective of creating a corpus for the employees but differ on four parameters: flexibility, risk, returns, and tax. If an employee plans smartly with either or a combination of both, he can retire with a handsome corpus. This choice of NPS v. EPS or both depends on Age and Salary.

Before we explain how to choose, we must first understand the basics of these schemes and the difference between them.

2. EPF v. NPS

EPF is a scheme run by the Employee’s Provident Fund Organization (EPFO) to provide employees with social security and retirement benefits. Employers must register with the EPFO and make an EPF contribution if they employ a workforce of 20 or more whose monthly salary is up to Rs. 15,000. Nonetheless, an employer can voluntarily contribute to the EPF regardless of his obligations due to the non-fulfilment of these conditions. When an employer or employee chooses to contribute to the EPF scheme, 12% of the basic salary (plus dearness allowance) is deducted from an employee’s monthly salary and credited to his PF account. The employer also matches the similar contribution, paid out of his coffers, in the employee’s PF and pension account in the proportion of 3.67% and 8.33%, respectively. The employer has to allocate an additional 0.50% of the employee’s salary to the Employee’s Deposit Linked Insurance Scheme (EDLI) and 0.50% towards the administrative charges. Where the employee’s salary exceeds Rs. 15,000 per month, the employer’s contribution to the pension account is limited to 8.33% of a Rs. 15,000 salary. Therefore, only 8.33% of Rs. 15,000 is contributed to the pension account, while any additional contribution goes into the PF account.

NPS is also a voluntary retirement savings scheme administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Unlike EPS, any Indian citizen, employee or self-employed, can join NPS individually or as part of an employee-employer group. The NPS provides flexibility in choosing investments in equity, government bonds or corporate debentures. It also allows subscribers to choose Pension Fund Managers (PFMs) to manage their investments. Subscribers can switch between investment options and fund managers and choose the investment composition from Active or Auto. NPS provides two types of accounts to the subscribers – Tier I and Tier II. Tier I is a mandatory retirement account, whereas Tier II is a voluntary savings account. Unlike Tier I account, Tier II offers greater flexibility in terms of withdrawal. There is no maximum limit on the amount one can invest in Tier I of the National Pension System (NPS) each year. However, a minimum of Rs. 1,000 must be invested every year.

3. Partial Withdrawal

The EPF allows employees to withdraw partially during service for specified purposes. Partial withdrawal is allowed after five years for purchasing or repairing a house, seven years for marriage or education, and ten years for paying an existing debt. However, there is no lock-in period for withdrawals in case of medical emergencies or for disabilities.

Under the National Pension System (NPS), subscribers must have a mandatory subscription period of 3 years for partial withdrawal only for specified purposes of higher education, marriage, home purchase, specified illnesses, and medical expenses due to disability.

EPF members can make partial withdrawals within the limits set by EPFO for each specific purpose, while NPS subscribers can withdraw up to 25% of their NPS contribution at the point of such withdrawal. In NPS, subscribers are allowed a maximum of three partial withdrawals throughout the tenure. In contrast, the number of withdrawals in EPF varies depending on the purpose of the withdrawal.

4. Maturity and Pre-Maturity Exit

EPFO allows members to withdraw total funds from the EPF account in the event of superannuation or death. Further, a member can withdraw his entire contribution (including interest) if he has been unemployed for at least two months. However, the contribution to the EPS cannot be withdrawn as it is converted into an annuity to pay a monthly pension.

When a subscriber exits from the NPS upon attaining the age of 60 or on superannuation, a complete lump sum withdrawal is allowed if the corpus is up to Rs. 5 lakhs. If the corpus is more than Rs. 5 lakhs, 40% is invested in the annuity to pay the monthly pension, and the remaining 60% is paid as a lump sum. When a subscriber opts for the pre-mature exit from NPS, the withdrawal limit depends on the corpus size. A complete lump sum withdrawal is allowed if the corpus is up to Rs. 2.5 lakhs. If the corpus is more than Rs. 2.5 lakhs, 80% of the corpus is invested in the annuity to pay the monthly pension, and the remaining 20% is paid as a lump sum. For pre-mature exit, a subscriber (with no employee-employer relationship) must have completed a five-year mandatory subscription period of 5 years.

5. Pension

EPF members who have rendered ten years of service or more and retire at 58 are entitled to monthly pensions. An early pension may also be allowed for those who have rendered ten years of service or more but retire or otherwise cease employment before age 58. These members receive a pension based on the EPS formula, with a minimum monthly pension of Rs. 1,000

In NPS, subscribers also buy an annuity to receive a pension. The amount of pension depends upon the following factors:

• Age of the subscriber at the time of buying an annuity (and his spouse, if married)
• Marital status of the subscriber
• NPS Corpus to be utilised to buy the annuity
• Frequency for payment of pension (Monthly, Quarterly, Half-Yearly and Yearly)
• Annuity Service Provider (15 Insurance companies are listed to buy the annuity)
• Annuity Types: With Return of Purchase Price (With ROP) and Without Return of Purchase Price (Without ROP).

Using the calculator available at this link, you can calculate the actual pension to be received when you buy the annuity from the NPS Corpus.

6. Risk

The risk in the EPF and NPS can be measured based on the portfolio’s composition and avenues in which the EPFO and NPS Fund Manager invest. While the NPS provides the flexibility to choose the portfolio composition to invest the subscriber’s contribution, the EPF does not offer such a choice.

The EPFO allocates the member’s funds into various investment avenues such as Government Securities, Debt Instruments, Money Market Instruments, Equity Market, Mutual Funds, Exchange Traded Funds (ETFs), REITs, InvITs and AIFs[1]. There is a minimum and maximum limit for investment in these allowed avenues. In NPS, subscribers can decide from the following investment class and percentage allocation in each class:

• Class E: Equity
• Class C: Corporate Debts
• Class G: Government Bonds
• Class A: Alternative Investment Funds.

NPS also offers a straightforward option of ‘Lifecycle Fund’ for subscribers lacking investment expertise. It allocates funds across asset classes based on age according to a preset portfolio that adjusts with the subscriber’s age.

The investment options and the limit on such investments have been given below:

7. Returns

The EPF account has historically yielded an average annual return of 8% to 8.5%. The NPS offers varying returns depending on where the subscriber invests. Typically, equity investments yield between 15% to 17%, while government bonds and corporate debentures generate returns of 7% to 9%. Alternative investment funds provide returns of 6% to 8%.

8. Tax on Contribution

There is no taxation on the employee’s contributions to EPF and NPS. Rather, an employee is allowed a deduction under Section 80C and Section 80CCD with respect to contributions made to EPF and NPS, respectively.

Regarding the employer’s contribution to EPF, contributions up to 12% of the employee’s salary is not taxed in the hands of the employee. The employer’s contribution to the NPS is included in the employee’s salary income. However, employees can claim a deduction under Section 80CCD(2) for the lower of the employer’s contribution to the NPS or 14% of salary for Central or State Government employees or 10% of salary for other employees.

It is to be noted that if the employer’s aggregate contributions to an employee’s Recognized Provident Fund, National Pension Scheme and Approved Superannuation Fund exceeds Rs. 7,50,000 in a year, the excess amount will be taxable as a perquisite in the hands of the employee. Any annual accretion through interest, dividends, or similar income on this excess amount will also be taxable as perquisites.

9. Tax on Accretion

Interest accrued on EPF is taxable in two scenarios. Firstly, the excess interest is taxable if the provident fund pays interest exceeding 9.5%. Secondly, if an employee’s annual contribution exceeds Rs. 2,50,000, the interest income on the amount exceeding this threshold becomes taxable. However, if there are no contributions from the employer, this limit is raised to Rs. 5,00,000.

Returns from the NPS account, accumulated throughout the investment period, are exempt from tax up to 60% of the corpus.

10. Tax on Withdrawal

The amount withdrawn from the EPF on retirement or after completing five years of continuous service is tax-free. If the withdrawal is made before completing five years of continuous service, not only is the amount received charged to tax in the year of withdrawal, but all tax concessions availed by an employee in the years of contribution are also reversed., except when the member lost the job due to health issues, business closure, unforeseen circumstances or if the entire balance is transferred to the employee’s NPS account under section 80CCD. Pension received from EPS is fully taxable under the head of ‘Income from Salary’.

When a subscriber partially withdraws from the NPS, the entire amount received is tax-exempt. However, in the case of normal exit or superannuation, only 60% of the corpus amount at the time of withdrawal is tax-exempt in the hands of the subscriber. Suppose the subscriber buys the annuity with the remaining 40% of the corpus. In that case, the pension he receives shall be fully taxable in the hands of the subscriber either under the head of ‘Income from Salary’ or under the head of ‘Other Sources’.

11. Return Comparison

In the tables below, we have compared the returns of Employee A, who is 25 years old, and Employee B, who is 40 years old, under EPF and NPS, based on the following parameters:

• Total return if their basic salary is Rs. 50,000 or Rs. 1,00,000.
• An equal amount is contributed in EPF and NPS.

Both employees will retire at the age of 60. Employee A will contribute for 420 months, and Employee B will contribute for 240 months before retirement.

The contribution to the EPF will be 12% for each employee and employer. The contribution to the NPS shall be 10%[2] by the employer and 14% by the employee.

PS: The calculations provided below are on an approximation basis.

Note: The interest on EPF contributions is computed on a monthly basis but credited to the account on 31st March every year. For calculation purposes, a fixed interest rate of 8.15% per annum is assumed over the years.

^† The employee is assumed to invest 75% in equity, 10% in corporate bonds and 15% in government securities.

^‡ The monthly pension under the EPS is based on the formula of Monthly Member’s Pension = Pensionable Salary * Pensionable Service/70

Note: The interest on EPF contributions is computed on a monthly basis but credited to the account on 31st March every year. For calculation purposes, a fixed interest rate of 8.15% per annum is assumed over the years.

^† The employee is assumed to invest 50% in equity, 25% in corporate bonds and 25% in government securities.

^‡ The monthly pension under the EPS is based on the formula of Monthly Member’s Pension = Pensionable Salary * Pensionable Service/70

12. Conclusion

Choosing between EPF and NPS depends on factors such as the risk profile of the employee, his desired retirement corpus, and tax planning preferences. EPF is known for its stability and guaranteed returns, making it an attractive option for those with low-risk appetites who prefer a predictable and secure retirement fund. In contrast, NPS is suitable for individuals with a higher risk appetite who are willing to accept market fluctuations for greater growth. Given the market volatility experienced during events like the COVID-19 pandemic, where many investors faced significant losses, it is advisable to prepare a balanced retirement strategy by investing in both EPF and NPS.

[1] Notification No. 1071 (E) dated 23-04-2015, as amended from time to time. The Notification is issued by the Ministry of Labour and Employment, Govt. of India in exercise of the powers conferred by sub-paragraph (l) of paragraph 52 of the Employees’ Provident Funds Scheme, 1952

[2] We have considered 10% as the employer’s contribution as this is the limit for deduction under Section 80CCD(2) towards the employer’s contribution. The employer’s contribution to NPS is first included in salary income of the employee and then deduction under section 80CCD(2) is allowed subject to threshold limit. Thus, any contribution by the employer in excess of this limit shall be taxable in the hands of the employee.

[3] 8.33% of the employer’s contribution goes to the Employee Pension Scheme (EPS). However, the contribution cannot exceed Rs. 1,250 per month.

[4] 8.33% of the employer’s contribution goes to the Employee Pension Scheme (EPS). However, the contribution cannot exceed Rs. 1,250 per month.