EPF vs. NPS: Which Retirement Plan is Best for You

Introduction

Retirement planning is crucial for financial security in your later years. Two popular options in India are the Employees’ Provident Fund (EPF) and the National Pension System (NPS). Both offer tax benefits and aim to help you accumulate a retirement corpus, but they differ in structure, flexibility, returns, and withdrawal options. Let’s explore these plans in detail to help you choose the one that best fits your retirement goals.

Overview of EPF and NPS

EPF (Employees' Provident Fund)

The EPF is a government-backed retirement savings scheme primarily for salaried employees. It is mandatory for companies with 20 or more employees to register under the EPF Act. A portion of your salary is deducted and contributed to the EPF account, with your employer also making a matching contribution.

• Employee contribution: 12% of basic salary + Dearness Allowance (DA).
• Employer contribution: 12% of basic salary + DA (8.33% goes to the Employee Pension Scheme, and 3.67% to EPF).

If you are interested in learning more about the Employee Provident Fund (EPF) and how it can contribute to your long-term savings, be sure to check out my detailed post on Employee Provident Fund. In this article, I cover everything you need to know, from eligibility criteria to the benefits and withdrawal process.

Additionally, to help you plan your EPF contributions effectively I've prepared an  EPF Calculator . This tool allows you to estimate your Employees' Provident Fund (EPF) balance and plan for a secure financial future.

 

NPS (National Pension System)

NPS is a voluntary, government-sponsored pension scheme open to all Indian citizens, including employees in both public and private sectors. It allows you to invest in a mix of equities, corporate bonds, and government securities, and is designed to generate long-term retirement savings.

• Employee contribution: Flexible (minimum ₹1,000 per year).
• Employer contribution: In some cases, private employers offer matching contributions under corporate NPS.

If you're looking for a comprehensive guide on the National Pension System (NPS), including its benefits, eligibility criteria, types of accounts, tax benefits, and withdrawal rules, be sure to check out my detailed post: National Pension Scheme (NPS): A Comprehensive Guide

Planning your retirement savings can be complex, but my NPS Calculator simplifies the process. This tool helps you estimate your potential retirement corpus based on your contributions, expected returns, and retirement age.

Comparison of Key Features

1. Contribution

• EPF: The contribution is fixed at 12% of basic salary + DA.
• NPS: The contribution is flexible, allowing you to decide how much you want to contribute periodically (monthly, quarterly, or yearly). The minimum annual contribution is ₹1,000, making it a more customizable option.

2. Investment Strategy

• EPF: The EPF corpus is predominantly invested in government securities, and the interest rate is decided annually by the EPFO (Employees’ Provident Fund Organization). This means EPF offers fixed returns and is less volatile, but there’s no control over how the money is invested.

• NPS: In NPS, you have the freedom to choose from different asset classes:
• Equity (E): Up to 75% of your portfolio.
• Corporate Bonds (C): Investment in corporate debt.
• Government Bonds (G): Investment in government securities.

You can either opt for active choice, where you select your asset allocation, or auto choice, where allocation is done automatically based on your age. NPS gives you the potential for higher returns but with greater risk due to equity exposure.

3. Returns

• EPF: The interest rate for EPF is fixed by the government each year. As of FY 2022-23, the interest rate is 8.15%, offering stable returns.

• NPS: The returns on NPS are market-linked and vary based on the performance of the underlying assets (equities, bonds, and government securities). Historically, NPS returns have ranged between 8%-12%, depending on the asset mix chosen.

4. Tax Benefits

EPF:

• Employee contributions are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act.

• The interest earned and the maturity proceeds are tax-free, provided you’ve completed five years of continuous service.

NPS:

• Contributions are eligible for a deduction of up to ₹1.5 lakh under Section 80C.

• An additional deduction of ₹50,000 is available under Section 80CCD(1B) for NPS contributions.

• Upon maturity, 60% of the corpus can be withdrawn tax-free, while 40% must be used to purchase an annuity, which is taxable as per the individual’s tax slab.

5. Withdrawal Rules

• EPF: You can withdraw the entire EPF corpus upon retirement or after 58 years of age. Partial withdrawals are allowed for certain purposes, such as marriage, education, home loan repayment, or medical emergencies.

• NPS: NPS matures when you reach 60 years of age. Upon maturity, you can withdraw up to 60% of the corpus lump sum, which is tax-free. The remaining 40% must be used to purchase an annuity to provide a monthly pension, which is taxable.

6. Liquidity

• EPF: EPF offers more flexibility for partial withdrawals in case of emergencies like medical treatment, marriage, home construction, or higher education, even before retirement.

• NPS: NPS is relatively less liquid. Partial withdrawals are allowed, but only after completing 3 years in the scheme, and are restricted to specific conditions like higher education, home purchase, or medical emergencies.

FAQs

Q1: What is the primary difference between EPF and NPS?

A1: The primary difference lies in the risk and return profile. EPF offers fixed returns with lower risk, while NPS has the potential for higher returns with higher market risk due to its equity exposure.

Q2: Which investment offers better tax benefits?

A2: Both EPF and NPS offer significant tax benefits. EPF contributions and interest are tax-free under the old tax regime. NPS contributions are eligible for tax deduction under Section 80C, and an additional ₹50,000 can be claimed under Section 80CCD(1B).

Q3: Can I invest in both EPF and NPS?

A3: Yes, you can invest in both EPF and NPS. Many individuals use EPF as a stable retirement fund and NPS for additional growth potential and tax savings.

Q4: What happens to my EPF or NPS account if I change jobs?

A4: If you change jobs, you can transfer your EPF balance to your new employer’s EPF account. For NPS, you can continue with the same account regardless of job changes as it is not employer-specific.

Q5: Is NPS suitable for someone nearing retirement?

A5: NPS can still be suitable due to its potential for higher returns, but it’s essential to consider the higher market risks. As retirement nears, you may want to shift to more conservative investment options within NPS.

Q6: Which is better for someone with a low-risk tolerance?

A6: For someone with low-risk tolerance, EPF is generally better due to its guaranteed returns and government backing.

Conclusion

Both EPF and NPS are excellent retirement saving tools, but the choice depends on your financial goals, risk appetite, and need for flexibility. If you are looking for safety and guaranteed returns, EPF is the better option. However, if you are open to market risks and wish to accumulate a larger retirement corpus through higher returns, NPS could be more rewarding.

Ideally, a combination of both EPF (for guaranteed returns) and NPS (for market-linked growth) can provide a balanced retirement portfolio.