The Indian government offers two popular retirement schemes – the Employees’ Provident Fund (EPF) and the National Pension System (NPS). While both are designed to provide financial security during retirement, knowing the difference between NPS and EPF will help make an informed decision for a secure future.
Employees’ Provident Fund (EPF)
EPF is a mandatory retirement savings scheme managed by the Employees’ Provident Fund Organisation (EPFO) under the Ministry of Labour and Employment. It requires both employers and employees in the organised sector to contribute a percentage of the employee's basic salary and dearness allowance to the EPF account. The features of the EPF are as follows:
- Contribution: Both the employer and employee contribute 12% of the employee's basic salary and dearness allowance to EPF.
- Tax benefits: Contributions are tax deductible under Section 80C of the Income Tax Act.
- Withdrawal: EPF allows withdrawals for specific purposes, like buying or constructing a house, medical emergencies or retirement.
- Interest rate: The government sets the EPF interest rate, which is currently at 8.25% per annum.
National Pension System (NPS)
NPS is a voluntary retirement savings scheme where you can contribute a part of your income. Unlike EPF, NPS is open to both the organised and unorganised sectors and functions similar to a Mutual Fund. If you decide to open an NPS account, you first need to choose a pension fund manager. Any Indian citizen aged between 18 and 70 years can invest in reliable PFMs like the Axis Pension Fund Management. You also get additional tax benefits by investing 10% of your salary under corporate NPS. The key features include:
- Contribution: You can contribute to NPS with a minimum amount of ₹500 per year.
- Tax benefits: NPS contributions are tax deductible under Section 80CCD of the Income Tax Act.
- Investment options: NPS offers various investment options for different risk appetites and goals.
- Withdrawal: Upon retirement, you can withdraw part of the NPS corpus, with the rest used to buy an annuity.
Differences between NPS and EPF
| Aspect |
EPF |
NPS |
| Mandatory / Voluntary |
Mandatory for organised sector employees |
Voluntary |
| Contribution |
Both the employer and employee contribute a fixed percentage of the employee's salary |
You can contribute any amount you wish to |
| Investment allocation |
Offers a fixed interest rate as it focuses on debt investments with a limited cap on equity allocation |
Provides various investment options with different risk-return profiles by diversifying across government bonds, corporate debt and equities |
| Withdrawal |
Allows partial withdrawals for specific purposes |
A portion of the corpus should be used to purchase an annuity |
| Tax benefits |
EPF contributions and interest qualify for a deduction up to ₹1.5 lakh under Section 80C |
NPS contributions qualify for deductions up to ₹1.5 lakh under Section 80C, an additional ₹50,000 deduction under Section 80CCD (1B), and 10% withdrawal from employer contributions under Section 80CC (2) |
Also Read: Advantages and disadvantages of NPS
Conclusion
NPS and EPF are great long-term retirement savings tools, but you can also consider diversifying by investing in SIPs to create a well-diversified retirement portfolio. Ultimately, the right choice will depend on your individual financial goals, risk appetite and retirement planning needs.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
