Know your contribution EPF vs NPS

If you are looking to create a sizeable post-retirement fund, the National Pension Scheme (NPS), and the Employee Provident Fund (EPF), are good choices. However, these schemes differ in terms of functionality, returns, and a host of other factors. Intrigued? Read on to know more about the differences between NPS and EPF.

What are EPF and NPS?

Let’s begin by making a note of what are NPS and EPF? The NPS scheme is a government-sponsored social security scheme for effective long-term retirement planning. Investors are encouraged to invest in their NPS account during their employment. Post-retirement, about 60% of the matured sum can be withdrawn either lumpsum or instalments, while the remaining 40% must be used to purchase annuity.

EPF is a retirement savings scheme for salaried professionals. It is a savings platform that enables employees to save a portion of their monthly salary for use upon retirement or unemployment. A large number of salaried professionals heavily rely upon the accumulated sum in their EPF accounts for post-retirement stability.

Read more about NPS vs PPF here.

Difference:

What are the critical differences between NPS and EPF? The chief difference between EPF and NPS is that while EPF provides guaranteed tax-free returns in the form of annual interest on the sum deposited in the EPF account, NPS offers market-linked returns. The rate of interest on EPF is determined by the Government of India, whereas for NPS, the returns depend on market volatility.

While EPF offers tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, NPS provides a total tax benefit of up to Rs. 2 lakhs under Section 80CCD (1) and Section 80CCD (2).

Another fundamental difference between NPS and EPF is that while EPF is only meant for salaried employees working in the private sector, NPS is open to any Indian citizen, even self-employed individuals, of between 18-60 years of age.

Unlike EPF, wherein 12% of an employee’s basic salary is deducted towards contribution to EPF, NPS is entirely voluntary, and an NPS account holder/investor must contribute either a lump sum or small instalments in their NPS account.

Minimum investment amount:

The minimum amount to be invested in a financial year in an NPS account is Rs 6,000 with no upper limit. For EPF, the contribution is restricted to 12% of the basic monthly salary. However, an employee can also make an additional voluntary contribution to their EPF account. Furthermore, the entire maturity sum can be withdrawn from an EPF account on maturity, whereas it is mandatory for 40% of the matured amount to be invested in annuities in the case of NPS.

Now that we’ve dealt in detail about the differences between NPS and EPF, are you ready to make your first NPS contribution and build your retirement fund?

Click to open an NPS account now.

* 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.