EPF vs NPS: Today when there are lots of investment options, most of the investors are confused about which option to invest in. National Pension System (NPS) and Employee Provident Fund (EPF) are the most popular investment options for most workers. Investing in both these options gives double benefit, along with tax savings, they also provide good returns to the investors. However, which option is better in both, it also depends on the risk-taking ability of the employee, security lock-in, liquidity and maturity etc. Some important points are given below for choosing better options in NPS and EPF, on the basis of which you can decide in which investment will be better.
Contribution to EPF
The law related to provident fund has been there for many decades and it is mandatory for companies with more than 20 employees to offer it to their employees with a basic monthly salary of less than 15 thousand. However, employees with a basic salary of more than this can also contribute to it.
The minimum contribution in EPF is 12% of PF salary, which is an aggregation of basic salary, DA (dearness allowance), cash value of food concession and retention allowance. According to the wishes of the workers, the maximum contribution can be limited to 12 per cent of Rs 15 thousand i.e. Rs 1800 per month. However, if the worker wishes, he can make a voluntary contribution of 100% of his basic salary to the EPF.
Contribution to NPS
NPS, unlike EPS, was launched in the last decade and is a pension-less investment initiated by the Government of India. Indian citizens and overseas citizens of India cardholders can invest in it. NPS is a voluntary contribution scheme in which a minimum contribution of Rs 500 in Tier 1 and Rs 1000 in Tier 2 account can be done. Any individual can connect to the NPS through its employer or independently. In this, investors can choose the option to invest in equity, corporate debt and government bonds according to their ability to take the money.
Tax liability / deduction on NPS (Tier 1)
- Under regular tax system, the employee’s contribution in NPS (Tier 1) up to Rs 1.5 lakh through the employer can be deducted from the total income.
- Under the regular tax system, the employee’s own contribution of 50 thousand rupees can be deducted in the total income.
- Under the regular tax system, up to 10% of the basic salary of the employer can be deducted from the total income.
- Talking about simple tax system, only up to 10% of basic salary is deducted by the employer.
- When NPS subscribers are 60 years old, they get approval to withdraw 60 percent of the amount from the corpus. The remaining 40 per cent is paid to the individual as an annuity. Apart from this, after 10 years of becoming part of the scheme, it is approved to withdraw up to 25 percent of the amount from the corpus.
Tax liability/deduction on EPF
- Under the regular tax system in EPF, there can be an employment contribution deduction of up to Rs 1.5 lakh from the total income. In addition, up to 12 per cent of the basic employee employment contribution is allowed.
- No deduction is available in the EPF under the Simplified Tax System.
- Interest received on post-session of employment is taxable.
- If there is a continuous job of the employer for less than five years, if any amount is withdrawn from the EPF, then tax is to be paid on it. However, if the employee has not done the continuous job in case of illness, weak business condition of the employer or any other situation which was beyond his control, then he will not have to pay tax.
(It is important to note here that if the EPF, NPS and superannuation fund has a contribution of more than Rs 7.5 lakh, then the employer will have to pay tax.)
Proposed changes in the budget
In Finance Bill 2021, it has been proposed that if the contribution of the employer to the provident fund exceeds Rs 2.5 lakh, then he may have to pay tax on the return. This will have an impact on people who have a higher income and make a contribution based on a more basic salary or a higher voluntary contribution. However, it will not have much impact on the common people and in such a situation, EPF still remains an attractive option.
Fixed-rate return on EPF
The government decides the returns under PF. The central government announces the interest rate of PF every year. In contrast, the return on NPS depends on the NAV of your chosen options, which can be reduced or can increase. In this way, investment in PF is almost safe and returns are assured whereas in NPS the risk is high and returns are also high. Thus both options have their own tax advantage and better returns for the common people.