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Employees Provident Fund (EPF) is one of the most common retirement savings or investment for a lot of people in the country. For many, EPF is the only retirement saving option as it is safe and offers great returns. Recent Changes to this programme leads us to compare with NPS.
This article covers what was changed recently, the difference between EPF and NPS, and the respective returns.
Recently, in the Indian Budget 2021, Finance Minister Nirmala Sitharaman announced a decision to tax interest incomes on annual EPF and VPF contributions of over Rs 2.5 lakh.
This proposal is going to severely impact the employee provident fund (EPF) returns of high-income earners in the next financial year. If your EPF and voluntary provident fund (VPF) annual contributions goes beyond Rs 2.5 lakh then the tax on interest will be the same as the income tax rate (including surcharge, if any) applicable to the individual. It may be noted that this will only be applicable to the employee’s share of provident fund and not the employers.
Proposal is going to severely impact the employee provident fund (EPF) returns
It may also be noted that the aggregate employer’s contribution to EPF, NPS and superannuation fund in excess of Rs 7,50,000 is taxable in the hands of the employee.
The National Pension System (NPS) and the Employees’ Provident Fund (EPF) are the two most common investment options available for employees that provide dual advantage of tax saving as well as good returns.
The options are simple – if you have a high-risk appetite invest in NPS while if you want safe and secured returns invest in EPF.
As your EPF (Employees' Provident Fund) is no more an EEE (exempt, exempt, exempt) category investment, it is important for you to know if you should consider other investment options after savings of Rs 2.5 lakh in your Provident Fund (PF) account as investments above Rs 2.5 lakh in EPF will result in paying tax.
EPF may continue to remain a better option whose risk appetite is low as it gives assured return though taxable above Rs 2.5 lakh investment. For people with higher risk appetite, the National Pension System (NPS) can be a better option provided they follow the money-making ideas using the flexibility available in the NPS scheme.
According to EZTax.in experts if someone has to choose between EPF and NPS, then it would be better to invest in NPS because it gives equity exposure that would give higher returns in the long-term. In NPS, one can invest up to 75% in equity. However, having 60% equity exposure is what makes an NPS account balanced. This 60:40 (equity:debt) ratio will give around 10.5% return on your investments in the long-term, which is around 2% higher than the current EPF interest rate. So, those who have higher risk appetite can go for the NPS instead of the EPF.
Provident Fund law has been present for several decades and is mandated to be offered by an employer to its employees. EPF contributions can be done by all irrespective of the nationality of the employee. Minimum contribution to EPF is at 12% of PF salary which is the aggregate of basic salary, dearness allowance, cash value of food concession and retaining allowance. The contributions can be restricted to Rs 1,800 per month. (12% of Rs 15,000) at the option of the employee.
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NPS on the other hand has been introduced in the last decade and is a pension-cum-investment scheme launched by the Government of India. Indian nationals and Overseas citizens of India card holders can invest in NPS. NPS is a voluntary contribution scheme with only a minimum contribution of Rs 500 in Tier I and Rs 1,000 in Tier II accounts. There is a choice of equity, corporate debt and government bonds depending on the risk preference of the investor.
Know more on NPS at National Pension Scheme (NPS) — Explained
The returns under PF are fixed with the interest rate announced by the government annually. However, the return on NPS is dependent on the NAV of the underline scripts which may rise or fall. Thus, while PF offers security and assured returns, NPS offers high risk and high returns.
The choice between NPS and EPF depends on the knowledge of the taxpayer, risk appetite of the employee, options exercised by the employee, security, the returns, liquidity, lock-in, maturity among others.
A comprehensive list of income tax saving investment options in India that every taxpayer to follow, and our detailed analysis including rate of return, risks, rewards. Visit Income Tax Saving Options
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