NPS vs Provident Fund

The NPS (National Pension Scheme) and the EPF (Employee Provident Funds) or PF (Provident Funds)are retirement schemes most people invest in. Both these plans help you set some money aside for your retirement to lead a fulfilled life. What’s more, both offer returns and both have specific interest rates too.

So, the question is, which of these two plans you should invest in? Well, if you’re wondering the same thing, the best way to arrive at a decision is to compare both these plans are choose a plan that suits your unique financial situation better. And if you’re looking for a one-stop solution, we’ve got you covered with this article.

What is NPS?

The NPS is a pension system sponsored by the government. Here an individual’s savings are linked to the market, and the funds attract returns based on the fluctuations of the market. This makes them similar to Mutual Funds. The difference? NPS subscribers are also liable for tax deductions according to the Income Tax Act.

What is EPF?

The EPF is a post-retirement fund supervised by a statutory body of the government. In simple terms, the fund activities are overseen by the government. Here, the employees need to pay a set percentage of their total salary towards the fund, and employers will pay an identical amount of money towards the fund. After the fund matures, the employee can claim the entire corpus along with the interest earned on them.

Now that we know what the NPS and the EPF are all about, let’s jump right to the differences between them, shall we? Here are the differences between the two funds grouped by features.

Difference Between Provident Fund and Pension Fund

• Nature of contribution

The NPS is a monetary retirement investment. This means any employed person, irrespective of the stage of their career can invest in the NPS scheme and benefit from returns.

In contrast, the EPF is a mandatory investment if you earn below Rs. 15,000 per month. However, it is voluntary for all other employees.

• Minimum investment

One must invest a minimum of Rs. 6000 annually to keep the NPS fund active.

However, for an EPF, one must set aside up to 12% of their salary every month towards the investment. 

• Taxability

About 60% of the funds can be withdrawn tax-free from an NPS fund.

Contrastingly, both the principal and the interest are tax-free in an EPF.

• Matured sum

While one can withdraw up to 60% of the funds from NPS when they are 60 years of age, the balance amount needs to be used to buy an annuity.  But EPFs have no such specifications. In fact, employees can withdraw all the funds when they are 58 years old.

• Risks

NPS returns depend on the market. However, since EPFs are government-backed, they are relatively safer investments.

How Does NPS Generate Higher Returns than EPF?

The National Pension System (NPS) has the potential to generate higher returns than the Employees’ Provident Fund (EPF) due to its market-linked investment structure. NPS allows investor contributions in a mix of equities, corporate bonds, and government securities. Thus, offering the potential for better long-term growth. 

While EPF provides a fixed interest rate set by the government, NPS returns depend on market performance, making it more dynamic. NPS has delivered average returns in the range of 9-11%, offering flexibility and high return potential than EPF’s fixed interest rate.

How Can an Employee Join NPS When They Already Have an EPF Scheme?

Employees covered under the EPF scheme can still enrol in NPS as an additional retirement savings option. NPS is a voluntary scheme, meaning employees can contribute independently without affecting their EPF contributions.

To join NPS, you need to:

• Open an NPS account through their employer (if corporate NPS is available) or online by visiting the eNPS website.
• Choose an investment allocation strategy.
• Make regular contributions as per their financial goals.

What are the Benefits of NPS After Retirement in the Company?

After retirement, NPS provides multiple benefits that ensure financial security:

• Lump sum withdrawal: Upon retirement at 60, an investor can withdraw up to 60% of the corpus tax-free.
• Regular pension: The remaining 40% is used to purchase an annuity, ensuring a steady income post-retirement.
• Flexibility: Employees can continue investing in NPS until 75 years of age, allowing their corpus to grow.
• Tax benefits: Withdrawals and annuity payments come with tax advantages, making NPS a tax-efficient retirement tool.

Now that you know all about NPS and EPF, it is time to invest your savings. And if you’re looking for an easy way to apply to these funds, simply use the MoneyFy app from Tata Capital.

FAQs on NPS vs Provident Fund

What are the disadvantages of NPS?

One of the biggest disadvantages of NPS is its limited liquidity due to restrictions on premature withdrawals.

What is better, EPF or NPS?

EPF offers stable, government-assured returns and is tax-exempt at maturity, making it suitable for risk-averse investors. NPS provides potentially higher, market-linked returns with additional tax benefits but comes with higher risk. Ultimately, the choice depends on your risk tolerance and retirement goal.

Is it good to transfer EPF to NPS?

Transferring EPF to NPS is not a common practice and may not be beneficial, especially for those nearing retirement, due to differing tax treatments and withdrawal rules.

Is PPF a pension fund?

No, PPF is a long-term savings scheme with a 15-year tenure, offering tax benefits and fixed returns.