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Difference between EPF and NPS

Difference between EPF and NPS
January 27, 2025

Table of Content

 

The EPF and NPS are two popular retirement plans in India offering the citizens financial security post-retirement. The EPF applies to salaried employees employed in an organisation, whereas the NPS membership is voluntary for all. The difference between the two is mainly in the structure, returns, and withdrawal rules are another major difference. Knowing their features, benefits and differences helps people choose the right one matching individual goals for risk appetite and retirement purposes.

Continue reading this blog to gain detailed insights about NPS and EPF, its features, advantages and more.

What is EPF?

The Employees Provident Fund (EPF) is a savings scheme made available to all salaried employees in India during retirement. This scheme is well administered by the Employees Provident Fund Organization (EPFO), a statutory body under the Ministry of Labour and Employment, Government of India. Under this scheme, both the employee and employer contribute about 12% of the employee's basic salary towards the fund. Both of them can avail benefits of insurance, pension and lump sum payment once retired. 

Moreover, your employer here deducts a fixed amount from your salary each month and puts it with contribution into your EPF account. The amount saved in the EPF account can further be used for availing a loan or withdrawing it for meeting expenses post-retirement. The funds accumulated in an EPF account earn interest, and the rate is determined by the government each year. Withdrawals from the EPF account can be made at retirement or earlier, under specific circumstances like job change, medical emergencies, or for purchasing a house.

Features of EPF

The Employee Provident Fund (EPF) account provides tax benefits and financial assistance during emergencies. Alongside this, it provides numerous benefits to salaried individuals. Here are some key features of EPF being explained in detail:

1. Contribution

Both the employee and employer have significant contributions towards the EPF account. Each of them contributes about 12% of the basic salary of employees and dearness allowance each month. This thereby ensures maintaining consistency in savings throughout the working life of an employee. The contributed amount forms a significant part of the retirement corpus of an employee. 

2. Tax Benefits

The contributed amount of EPF is eligible for tax deductions under Section 80C of the Income Tax Act. Thus, the taxable income of employees reduces. Additionally, the interest accrued and withdrawal amount are also exempted from taxes. This thereby makes EPF a convenient savings option. 

3. How to Withdraw Funds

With EPF, you can experience partial withdrawals to meet specific needs. Employees are allowed to withdraw funds to meet purposes relating to purchasing and constructing a house, educational expenses and medical treatments. Employees can also withdraw significant amounts during financial emergencies. The full withdrawal is only eligible during the time of retirement or after leaving a job. 

4. Rate of Interest

It is the duty of the government to decide the EPF interest rate annually. The interest earned on the EPF account gets gradually added up to the respective EPF balance each year. This enables savings to grow over time, thereby ensuring financial security for the future.

What is NPS?

The full form of NPS is the National Pension Scheme. It is an initiative undertaken by the Government of India and aims to provide retirement benefits to citizens of India. Setting up an NPS account inculcates a habit of saving among the citizens post-retirement. 

NPS is a well-known contribution scheme which is market-linked and managed well by professional fund managers. This account is well regulated and administered by the Pension Fund Regulatory and Development Authority under the PFRDA Act, 2013. Individual savings are converted into a pension fund under NPS. Several fund managers invest savings into diversified portfolios which consist of Bills, Government Bonds, Shares and Corporate Debentures. 

Individual subscribers make significant contributions to the National Pensions Scheme and the amount is accumulated until retirement. Subscribers can also exit this plan before retirement or can also choose superannuation. However, this scheme ensures the utilization of a significant portion of savings with retirement benefits.

Features of NPS

The National Pension System (NPS) is a popular government-backed retirement savings plan. This scheme provides tax benefits, flexibility with long-term financial security. The main features of NPS are as follows:

1. Contribution

Employees can make significant contributions to NPS with a minimum amount of Rs. 500 each year. There is no maximum limit on contribution amount. This thereby enables individuals to save as they want for retirement. With regular contributions, a significant retirement corpus can be built over time. 

2. Tax Benefits

With NPS, employees can avail tax savings opportunities under Section 80CCD of the Income Tax Act. Contribution amount of up to Rs. 1.5 Lakh are deductible under Section 80C1. Additionally, a deduction amount of Rs. 5000 is also available under Section 80CCD1(1B). Thus, NPS is a reliable and convenient option for lowering taxable income. 

3. How to Withdraw Funds

At retirement, employees are eligible to withdraw about 60% of the NPS amount as a lump sum. Employees utilise the rest 40% for purchasing an annuity, thereby ensuring to maintain a regular income post-retirement. However, employees can also withdraw partially during the tenure to meet specific needs that include health, education or purchasing a house. 

4. Rate of Interest

The National Pension System does not have a fixed rate of interest. The investment returns depend on the performance of investment in corporate bonds, equities and government securities. On average, NPS offers around 8-10% of annual returns, thereby making it a market-linked retirement planning option for savings with long-term growth.

Difference Between NPS and EPF

The table below displays the main difference between EPF and NPS:

Feature 

NPS

EPF

Mandatory/Voluntary

Voluntary 

Mandatory specifically for organized sector employees

Allocation of Investment

Offers several options of investment with different risk-return profiles through diversification of corporate debt, government bonds and equities

Provides a fixed rate of interest as it primarily focuses on debt investments with a cap on the allocation of equities

Contribution

Contribute any amount you want

Both the employee and employer contribute a certain percentage of the salary of employee

Withdrawal

Uses a significant portion of corpus for purchasing an annuity

Allows to withdraw partially for meeting specific purposes

Benefits of Taxes

The contributed amount of NPS allows for deductions of up to Rs. 1.5 Lakh under Section 80C1, an additional deduction of Rs. 50,000 under Section 80CCD(1B) and withdrawal of about 10% of the amount from employer contributions under Section 80CC1 (2)

Contributions towards EPF and interest accrued qualify for a deduction of up to Rs. 1.5 Lakhs under Section 80C1

Choosing Between EPF and NPS

There are certain factors to consider to decide between EPF and NPS. The key considerations in this regard are:

  • Risk Tolerance

    • EPF returns have low risk, making it attractive for the safety-conscious investor looking for consistent and assured returns. NPS, on the other hand, is tied to the market's performance and therefore has the prospect for higher returns attached to the risk it carries. While going forward with a retirement plan, one who is tolerant of market fluctuations and seeks growth will probably welcome NPS.

  • Tax Benefits

    • Under Section 80CCD1(1B), the NPS makes an additional deduction of Rs. 50,000 allowable. For those looking to maximise tax savings, NPS could appear a very attractive option due to its higher deduction limits. However, another additional benefit is the tax-free status of EPF withdrawals after five years of service.

  • Duration of Investment

    • When it comes to investing for long-term savings oriented toward steady returns, EPF is a good investment. For a young investor with time to invest and the ability to tolerate market fluctuation, the NPS would be more appropriate. Those at a young age and working efficiently can see NPS returns becoming an important part.

  • Fund Accessibility

    • EPF allows for withdrawals for various needs, providing liquidity during emergencies and personal milestones. On the other hand, the NPS enforces stricter requirements for withdrawals that create a stronger preference towards scheme-oriented retirement funds. Where immediate access to funds is important, then EPF is ideal.

  • Retirement Goals

    • Assess your retirement goals and income needs. The NPS provides retirement benefits in the form of pensions through opting for the best annuity plan, ensuring stability post-retirement. If you’re looking to generate a steady income post-retirement, HDFC Life Retirement Plan are tailored plans ensure your requirements are met, helping you live worry-free during your golden years.

Summary

Overall, in short, both EPF and NPS are ideal for retirement planning. EPF is meant for those who are risk-averse and seek guaranteed returns with stability, and NPS is for those who prefer flexibility with quality returns. Here lies the main difference between NPS and EPF. Choices vary according to individual interests, financial goals, and attitude towards risk. When combined, they can secure a smooth and prosperous retirement.

FAQs on NPS and EPF

1. Can I have EPF and NPS both?

Yes, private sector employees can have both EPF and NPS. In other words, these employees with an EPF account can also subscribe to an NPS account. 

2. Is NPS good for private sector employees?

Yes, private sector employees are benefited from NPS as it enables them to save regularly. Thus, together, they assist in accumulating a higher retirement corpus. 

3. Are NPS and EPF enough for retirement?

Yes, both NPS and EPF are enough for retirement. Both are retirement savings schemes. Thus, starting to invest in these schemes at a young age helps in the accumulation of a significant retirement corpus.

4. Is NPS tax-free on maturity?

The tier-1 NPS account matures at the age of 60, allowing 60% of the fund value to be withdrawn-tax-free, while the remaining amount shall be invested in an annuity plan. The income earned through the annuity plan will then be taxed at the applicable tax slabs.

5. Which is best, NPS or EPF?

There is no distinct comparison between these two schemes. EPF provides guaranteed returns while NPS is a market-linked scheme. But, both of them complement each other in creating a substantial retirement corpus.

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1. Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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