NPS verse EPF

Date Published: March 23, 2021

SHCIL Classroom :

Mandated NPS
Mandated NPS
1. NPS is a mark to market investment product that allows exposure to
3 asset classes (Equity or E, Corp debt or C and Govt debt or G). It
potentially allows high exposure to Equity asset class (up to 75% for
NPS LC aggressive), which could work to a person’s advantage if
he/she has many years left to retirement (more than 10 years) and has
good knowledge or access to credible advice.
1. EPF is the Central Board of Trustees of the Employees Provident
Fund Organization (EPFO) EPF is hybrid product allowing limited mark
to market (subject to the calling of investment directed towards equity,
15%) and where the interest rate applicable to contributions not
directed towards equity is declared by GOI each year (typically this
interest rate falls in the range of 150-250 bps over prevailing 10 yr
Gsec yield). EPF is meant for the organized sector employees.
2. NPS due to recent changes introduced in it’s tax features could also
be interpreted as EEE. This is because contributions made are tax
exempt, accrued interest or MTM appreciation is tax exempt, while
maturity corpus withdrawal up to 60% lump sum is tax free, while the
remaining 40% has to be mandatorily annuitized.
2. EPF is EEE. One can argue that the minimum utilization of 40% of
maturity corpus in purchasing annuities is a disadvantage over 100%
tax free withdrawal of EPF corpus, and they would be right; however,
most Indians EPS post retirement do invest a significant portion of their
retirement savings into annuity or annuity like products (bank FD)
which are poor yield and income from whom is added to taxable
income.
3. NPS allows changing the asset allocation to E/C/G, not only due to
auto choice doing this as age changes, but by switching between
LC25, LC50, LC75. Hence, this flexibility potentially allows better
return/risk profile, for instance when LC25 is changed to LC50 on
account of better prospects of E performance versus C/G.
3. EPF serves primarily as a debt instrument, with an upper capping of
15% on equity allocation.
4. NPS is at age 60, need to purchase an annuity of 40% from your
accumulated pension wealth. The remaining portion is given to you as
lump sum. You may either take the lump sum in your bank account or
let it remain invested and collect it anytime till you attain the age of 70
years.
4 .EPF settlement, one has to retire from service after attaining 58
years of age. The total EPF balance includes the employee’s
contribution and that of the employer, along with the accrued interest.
Voluntary NPS
Voluntary NPS
NPS allows greater tax benefits due to Sec 80c, 80ccd1b and 80ccd2,
as compared to VPF. At the time of maturity.
VPF contributions made towards the EPF accounts are eligible for tax
deductions under the provisions of Section 80C of the Income Tax Act,
1951.
Potential for achieving better return/ risk profile with nos due to use of
active choice in deciding asset allocation and pension fund manager
No such flexibility in VPF. Also potential exposure to E is much higher
in NPS Vs VPF.
NPS allows nimbleness to respond to dynamic capital markets through
changed asset allocation specification.
VPF does not allows nimbleness to respond to dynamic capital
markets through changed asset allocation specification.

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