Invest in NPS or EPF? Experts explain benefits of retirement savings schemes

Under the new tax regime, salaried individuals can opt for both NPS and EPF to boost their retirement corpus. But which is better? Read on to find out.

Salaried individuals in India usually plan their retirement keeping in mind the National Pension Scheme (NPS) and the Employee Provident Fund (EPF). While anyone can opt for NPS, only full-time job holders can contribute to EPF.

Should you opt for both NPS and EPF in the new tax regime? (Pixabay)

Some employers provide options to employees to opt for both. Abe Abraham, Partner at Cyril Amarchand Mangaldas, told Livemint, “Not all employers offer NPS but if your employer does it, you can request them to make employer contribution part of your salary. You can have it along with employer and employee contribution to EPF, if you are comfortable with reducing your in-hand salary.”

“While NPS is optional, EPF is mandatory in most cases,” he said.

According to NPS rules, employees are not required to contribute to receive employer benefits and can request their employers to keep their contribution at any levels, going up to 14% of the basic salary. It is 12% in case of EPF. Employee contribution is mandatory in EPF to be eligible for the employer contribution, which is generally of the same amount.

Tax benefits of NPS and EPF

Employer contribution to NPS, which is a part of gross salary, qualifies for tax deduction when calculating tax liability. Employer contribution to EPF, which could be part of your CTC, is tax exempt. However, if the aggregate contribution to NPS, EPF and other superannuation funds crosses ₹7.5 lakh per annum, the excess amount gets taxable.

Employee contribution to EPF or NPS does not get any tax deduction in the new tax regime.

Flexibility of NPS and EPF

When switching jobs, employees have to transfer their EPF to the new employer as both existing and the new employer play a role in the process. On the other hand, NPS offers flexibility and continuity as it does not require employer approval to stop contributions or transfer your account.

If an employee's new employer provides NPS benefits, they can continue contributing without a pause despite switching jobs. If a person decided to quit their job and not join another job, they can convert their corporate NPS account to the all-citizen model. This allows the person to contribute to the account themselves by simply filing out the ISS form.

Asset allocation and returns of NPS and EPF

Returns generated via NPS are marked-linked and compound at a higher rate than EPF. The rate of return from the provident fund scheme is set by the Employees' Provident Fund Organisation annually, which is 8.25% for FY25. The contributions collected under EPF are invested as per rules by the EPFO.

NPS subscribers in the private sector can adjust their asset allocation up to four times in a financial year, based on their understanding of the markets, changing financial situation, or evolving goals. These switches across asset class do not trigger any tax impact, thus providing an efficient way to actively manage their investments, Tata Pension Fund Management CEO Kurian Jose told Livemint.

So far as withdrawals are concerned, 25% of your contributions can be withdrawn at any time, up to 3 times during your employment. Post retirement, 60% of the corpus can be withdrawn tax free and 40% goes to annuities to generate pension.

In EPF, partial withdrawal is possible while in the job. You can withdraw the full amount after leaving the job. Post-retirement, you can withdraw the full amount. Your withdrawal will be tax free only if you have completed five years of service.

NPS can held in generating higher pension depending on the amount a person uses for the lifetime payments they'll receive under the scheme. With EPF, a person can get a maximum pension of ₹7,500 per month.