)
The finance ministry has asked Employees' Pension Scheme to fold up and hand over subscribers to National Pension System. We give some FAQs about the two schemes:
What is Employee Provident Fund (EPF) and National Pension System (NPS)?
EPF is a mandatory retirement saving scheme and NPS is a voluntary one.
Who can invest in EPF and NPS?
Only a salaried individual can contribute towards EPF. But there is no such compulsion for NPS, anyone up to the age of 55 years can contribute towards it.
How to invest?
A salaried individual automatically starts contributing to EPF. There is provision to opt out of this but that declaration needs to be made at the beginning of the career. For NPS, all you have to do is subscribe to it and ask your employer to deduct a fixed amount every month or year. A host of companies, including Infosys, Wipro, Reliance Industries, Muthoot Finance, Colgate-Palmolive, Capgemini and Pantaloons, offer the NPS option. Many companies also contribute towards their employees' NPS.
What is the investment cost?
Investment in EPF is free of cost. The NPS charges fund management fees of 0.0102% for the government employees and there's a ceiling of 0.25% for the private sector.
How much can one invest in EPF and NPS?
An employee has to contribute at least 12% of his basic pay towards EPF. Of this, 8.33% goes in EPS, subject to a maximum of Rs 541 a month. Your employer contributes an equal amount towards your EPF corpus. Thus, at least 24% of your basic pay is invested in EPF. You can always invest more than the mandated 12% towards EPF.
The minimum investment towards NPS should be Rs 6,000 a year.
Where does the product invest?
EPF invests in government securities or bonds issued by government-owned companies. These are safer products. NPS is allowed to invest up to 50% of its corpus in equities. The advantage is that investment of long-term money in equities can earn better returns. At the same time, NPS rejigs its portfolio as per the investor's age.
How much can one earn?
NPS has given 8 to 14% returns in 2012-13 (average = 11%). And Employee Provident Fund Organisation (EPFO) is paying 8.5% for 2013-14. But the EPS portion does not earn any interest.
Are the returns assured?
The EPFO revisits its returns annually. But once fixed, it pays the same interest all year through. To that extent, EPF gives assured return. However, investment in equity does not allow NPS to offer guaranteed returns.
Is premature withdrawal allowed?
EPF allows premature withdrawal for specific purposes (house construction, child's marriage and illness), without foreclosure. However, EPS portion of EPF can be withdrawn only for nine years of service and till the age of 50, that too partially. If you've worked for over ten years then you are liable for pension.
Any premature withdrawal leads to account closure in the case of NPS. Up to 20% of the funds can be withdrawn from NPS before one turns 60; the rest has to be used to buy annuity.
Also, you can easily stop contributing towards EPF in desperate times; you can't do so with NPS.
What is the tax treatment for investment and returns from both the instruments?
An employee's contribution of only up to 10% of the basic and dearness allowance is eligible for deduction under Section 80CCD (this amount is within the Rs 1-lakh limit, under Section 80C). Most taxpayers exhaust a substantial part of the Section 80C limit through EPF contribution, which can be invested up to Rs 1 lakh, completely tax-free.
The pension earned after retirement is taxable at slab rate both for NPS and EPS.
