EPF vs NPS: Know the difference

When planning for a secure retirement, selecting the right investment vehicle is crucial. Two popular options in India for building a substantial post-retirement fund are the Employee Provident Fund (EPF) and the National Pension Scheme (NPS). While both serve the common goal of retirement planning, they differ significantly in terms of functionality, returns, eligibility, and tax benefits. This article provides a comprehensive comparison of EPF and NPS, helping you make an informed decision.

Employee Provident Fund (EPF)

The Employee Provident Fund (EPF) is a government-backed retirement savings scheme primarily designed for salaried employees in India. Under this scheme, both the employee and employer contribute a fixed percentage of the employee’s salary to the EPF account each month. This contribution is meant to build a corpus that the employee can access upon retirement or in certain cases of unemployment. The EPF scheme is managed by the Employees' Provident Fund Organisation (EPFO) and offers guaranteed returns in the form of annual interest, which is determined by the Government of India.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a voluntary, government-sponsored pension scheme designed to encourage long-term savings for retirement. Unlike EPF, NPS is open to all Indian citizens, including self-employed individuals, between the ages of 18 and 60. Investors contribute regularly to their NPS account during their working years, and upon retirement, they can withdraw up to 60% of the accumulated corpus. The remaining 40% must be used to purchase an annuity, ensuring a steady income post-retirement. NPS returns are market-linked, meaning they are influenced by the performance of the underlying investments.

1. Nature of Returns
   • EPF: Offers guaranteed returns with an interest rate set annually by the government. The returns are fixed and predictable, making EPF a low-risk investment option.
     
     
   • NPS: Provides market-linked returns, meaning the performance of the NPS is tied to the market. The returns can vary based on the investment choices made within the NPS, such as equity, government bonds, and corporate debt.
     
     
2. Eligibility Criteria
   • EPF: Exclusively available to salaried employees working in the organized sector. Employers with more than 20 employees are mandated to offer EPF to their staff.
     
     
   • NPS: Open to all Indian citizens, including salaried and self-employed individuals, aged between 18 and 60. There is no restriction based on the nature of employment.
     
     
3. Contribution Structure
   • EPF: Contributions are mandatory for both employees and employers. The employee contributes 12% of their basic salary, which is matched by the employer. The entire contribution is automatically deducted from the employee’s salary
     
     
   • NPS: Contributions are voluntary, with flexibility in the amount and frequency of investments. The minimum annual contribution is Rs 6,000, and there is no upper limit, allowing for higher savings.
     
     
4. Tax Benefits
   • EPF: Contributions to EPF are eligible for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. The interest earned and the maturity amount are tax-free, provided certain conditions are met.
     
     
   • NPS: Offers tax benefits under two sections: up to Rs 1.5 lakh under Section 80CCD (1) and an additional Rs 50,000 under Section 80CCD (1B), totaling Rs 2 lakh. However, the maturity amount is partially taxable, except for the 60% lump sum withdrawal, which is tax-free.
     
     
5. Liquidity and Withdrawal Rules
   • EPF: Employees can withdraw the entire accumulated corpus upon retirement or after reaching 58 years of age. Partial withdrawals are allowed under specific circumstances
     such as medical emergencies, marriage, or home purchase.
     
     
   • NPS: Up to 60% of the corpus can be withdrawn as a lump sum at retirement, with the remaining 40% mandatorily invested in annuities. Partial withdrawals before retirement are allowed under certain conditions, like for education, marriage, or buying a house, but these withdrawals are subject to restrictions.
     
     
6. Investment Choices
   • EPF: EPF investments are managed by the EPFO, with no input required from the employee. The investment is primarily in government securities, ensuring low risk and stable returns.
     
     
   • NPS: Offers a choice of investment options, including equity, government bonds, and corporate debt. Subscribers can choose their preferred investment mix or opt for an auto-choice option where investments are allocated based on the subscriber’s age.

• EPF: The contribution is fixed at 12% of the employee’s basic monthly salary, with an option for additional voluntary contributions. This contribution is automatically deducted each month.
  
• NPS: Requires a minimum annual contribution of Rs 6,000, which can be paid either as a lump sum or in installments. There is no upper limit on the amount that can be contributed, allowing investors to increase their savings as per their financial goals.

• EPF: Upon retirement or reaching the age of 58, the entire maturity amount can be withdrawn without any obligation to invest in an annuity.
  
• NPS: At maturity, 60% of the corpus can be withdrawn as a lump sum, while 40% must be used to purchase an annuity, providing a regular income stream during retirement.

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* Terms and conditions apply.  The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.