Switch from EPF to NPS – Will it be beneficial ?
Switch from EPF to NPS – Will it be beneficial ? – A trade-off between Assured Returns and Market Exposure for Additional Income Tax Exemption
FM announced in the recent Budget that Employees who are covered by Employees Provident Fund (EPF) will have an option soon to switch to NPS (New Pension Scheme / National Pension System). Though Modalities and Statutes are yet to be framed, proposed Switch from EPF to NPS may be enticing at first glance for the reasons that additional tax benefits have been announced in this budget up to Rs. 50,000 for investment in NPS under Section 80 CCD(1B).
Here is the small analysis of area where contributions of NPS and EPF are invested by fund managers, Returns in NPS and EPF and Income Tax Liability in respect of contributions and wealth accumulated in EPF and NPS.
Investment of contributions made in NPS:
Other than NPS covered Government Employees, investers in NPS tier 1 can either opt for active choice mode or Auto investment mode. These Active Choice NPS investers can opt for up to 50% exposure in equity and remaining contribution to be invested in either medium return or low return fixed income instruments such as Govt Bonds and Securities. If a Subscriber opts for Auto Choice, system will automatically calculate the asset allocation percentages based on the Subscriber’s age.
NPS contributions made by Government Employees in tier 1 account will be exposed only up to 15% in Equity.
Investment of contributions made in EPF:
EPF Contributions of an employee is invested only in Central and State Government securities, and bonds and deposits of PSUs and that too Pension wealth of an employee is not affected by market conditions. In other words, even in the case of flexible returns for bonds and securities based on market conditions, employees would be paid annual interest on their EPF deposits which gets compounded annually.
Liquidity in EPF and NPS :
Loans and partial withdrawals can be made in EPF scheme for eligible reasons. However funds available in NPS can not be withdrawn before the age of 60 years. However, NPS allows for withdrawal funds before the age of 60 years if an invester is investing 80% of his NPS wealth in a annuity Scheme. Even withdrawals after the age of 60 requires 40 % to be invested in annuity.
Income Tax on EPF and NPS:
Contributions to the EPF are tax-free under Section 80C. Interest earned and withdrawals after five years are not subjected to any Income Tax
In the case of NPS wealth except amount invested in annuities are taxable at the prevailing income tax rates.
With regard to Taxation of NPS contributions, own contributions up to Rs. 2,00,000 can be deducted under Section 80C and Section 80CCD(1B) from the salary income. However, out of this deduction an amount of up to Rs. 1.5 lakh allowed under Section 80C and Section 80CCD(1) will have to be shared by other savings if any such as LIC Premiums, ELSS etc. So, only an amount of Rs. 50,000 can be deducted separately under Section 80CCD(1B) in the case of own contributions in Tier 1 of NPS.
Moreover, the maximum amount that can be deducted under Section 80CCD(1) (which includes Section 80CCD(1B)) is limited to 10% of salary and 10% of total income of in the case of employees and self-employed respectively. So, the additional Income Tax Benefit announced in the Budget 2015 in the form of deduction up to Rs.50,000 invested in NPS Tier 1 account under Section 80CCD(1B) would be beneficial only to NPS contributors who are in high income group.
Returns from NPS and EPF:
Average Rate of of interest in EPF is in the range of 8% to 8.5% per annum.
NPS returns would not be fixed and may vary according to stock and Bond market conditions. NPS Returns for Govt Employees have been provided here as returns for other categories may vary depending upon Ratio of investment options viz., Equity, medium fixed Income and Low fixed Income, they choose. So, a NPS investor who has invested in the lines of NPS of Govt Employees (85% in fixed income instruments and 15% in Equity Instruments) with fund managers designated for NPS for Govt Employees would have earned same returns as returns for Govt Employees which are given below.
|Average NPS Returns in (%)|
|Year||Central Govt NPS|
(Up to Dec)
|From Launch of NPS||10.35|
From the above, it could be concluded that switching from EPF and NPS will a trade-off between Assured Returns and Market Exposure to investments to gain to get Additional Income Tax Exemption.