Which is better after Budget 2015?
NPS (National Pension Scheme) has been on the surface for more than 6 years but did not get attention as it is getting now after Budget 2015. This is because NPS is the only investment avenue which got additional tax break of Rs.50,000, over and above existing limit of Rs.1.50 lakhs under section 80C in the recent union budget.
Apart from the above benefit, Finance Minister also announced that employees can now be able to choose NPS over EPF i.e. employees will now have power to opt out of contributions to the Employees Provident Fund (EPF) and invest in the NPS instead. So, it becomes necessary to know the better investment avenue between EPF and NPS.
EPF vs. NPS
Eligibility
EPF: Any salaried person can become the subscriber of Employee Fund Organization. But Non-Salaried people i.e. Self-Employed cannot hold EPF account; they can open PPF account instead of EPF account.
Regarding age restriction, there is no specific age limit or restriction of becoming the member of EPFO. But if the employee's age is 58 years or more than he can choose not to get EPF contribution deducted from his pay.
Further, one can opt out of EPF contributions if monthly pay (Basic Salary Plus DA) is higher than Rs.15,000 (earlier, Rs.6,500 which was hiked in September last year).
NPS: Person falling in the age limit of 18 years to 60 years including NRIs can open and contribute towards NPS. Salaried as well as self-employed person can also open NPS account and avail benefit.
Contributions
Employees drawing salary up to Rs.15,000 per month have to mandatorily contribute towards EPF. The contribution of employee is fixed at 12% of the basic pay plus dearness allowance which is to be matched by employer also. Employee can also contribute over and above the stipulated figure of 12% as VPF (Voluntarily Provident Fund) but this extra contribution is not required to be matched by your employer.
The break-up of EPF Contribution (Salary Rs.15,000) is as follows:
| Scheme | Employee Contribution | Employer Contribution |
| Employee Provident Fund | Rs.1,800 | Rs.550.5 |
| Employees' Pension Scheme | 0 | Rs.1,249.5 |
| Employee Deposit Linked Insurance | 0 | Rs.75 |
In case of NPS, there is no fixed monthly contribution is required. You can pay as low as Rs.500 per month i.e. Rs.6,000 per year to maximum of Rs.2 lakhs per year whenever you want. You can also skip contributions for few months in case you need money or can pay at once. There should be atleast one transaction per annum and minimum deposit of Rs.6,000 per annum is mandatory.
Further, NPS constitutes two accounts: Tier I and Tier II. Contributions made to Tier I account are not withdrawal and eligible for tax deductions. Tier II account is just like savings account, you can withdraw money whenever you want without restrictions.
Investment Kitty
Your EPF Contribution is invested largely into the Debt Funds as well as Central and State Government Bonds, Securities and deposits from PSUs i.e. into the safest option which gives you guaranteed return with no default. But you have no control on it; this means you cannot choose where to invest your contributed money to earn more.
But in case of NPS, you can choose where to park your deposited money. NPS offers three different funds i.e. Equity Funds (E) that invest in Nifty stocks (maximum up to 50%), Debt Funds (C) that invest in corporate bonds and G-Sec (G) that invest in government securities.
In addition to the above selection, you can also select the fund managers who will manage your funds. The current fund managers are:
- HDFC Pension Management Company Limited
- ICICI Pension Fund Management Company Limited
- Kotak Mahindra Pension Fund Limited
- LIC Pension Fund Limited
- Reliance Capital Pension Fund Limited
- SBI Pension Funds Private Limited
- UTI Retirement Solutions Limited
- Birla Sun Life Insurance Company Limited (Yet to Start)
Once in a year, you can rejig your portfolio and can switch to another fund manager if not satisfied with the performance.
In case you have not designed your portfolio, the asset location is automatically done on the basis of your age under LifeCycle Fund. Up to the age of 35 years of the account holder the equity exposure remains at the maximum level i.e. 50% and after that equity exposure is reduced by 2% every year till the account holder reaches to the age of 55 years.
| Age of Account Holder | Asset Allocation | |
| Equity Funds (E) | Debt (C) + G-Secs (G) | |
| Up to 35 Years | 50% | 50% |
| 40 Years | 40% | 60% |
| 45 Years | 30% | 70% |
| 50 Years | 20% | 80% |
| 55 Years | 10% | 90% |
| 1. The reallocation is done each year on the birthday of account holder.2. After the age of 55 years, the investment mix remains same for the last 5 years | ||
Returns
Returns of EPF are floating i.e. interest rate of EPF is revised each year by the CBT. The current rate is 8.75%. Interest rates of preceding three years were 9.5%, 8.25% and 8.5% respectively.
NPS returns are totally depending upon your asset allocation and the fund manager you choose. If you are a risk taker and choose the equity exposure to the fullest than the returns are likely to be in double digits or vice-versa.
Liquidity
EPF money can be easily withdrawn before the maturity i.e. retirement. In case you switch jobs with a gap of more than 2 months, you are eligible to withdraw EPF. Apart from this there are numerous other conditions for which EPF money can be withdrawn and utilized such as for constructing or buying a home, repaying existing home loan, medical treatment, children marriage or education.
Read: EPF Premature Withdrawal Conditions
Premature withdrawal from NPS i.e. 80% of the money withdrawn before the age of 60 years should be necessarily used for buying annuity from the life insurer for the monthly pension of the account holder.
Even if withdrawal is made after attaining the age of 60 years, 40% of the withdrawn amount should be used to buy annuity i.e. only 60% can be deployed as per your wish.
Taxability
EPF falls into the category of EEE i.e. full tax-free category. EPF gives you tax-break of maximum of Rs.1.50 lakhs per annum on the contributed amount u/s 80C, the interest earned is not taxable and lastly the corpus received at the time of maturity is completely tax-free u/s 10(10D).
EPF proceeds are only taxable when the amount is withdrawn before completing 5 years of continuous service.
The worst part of the NPS is its tax-treatment. NPS has EET tax treatment i.e. the contributed amount is deductible and the yearly return from the NPS is also tax-free.
| Section | Maximum Contribution | Remarks |
| Section 80CCD | Rs.1,50,000 | Employee Contribution |
| Section 80CCD(1B) | Rs.50,000 (announced in Budget 2o15) | |
| Section 80CCD(2) | 10% of Basic Pay + Dearness Allowances | Employers Contribution |
But the maturity proceed from NPS is taxable. This means at the time of withdrawing money before or after 60 years of age, the remaining amount after buying annuity will be taxed. Also, the annuity in form of monthly pension will be taxable as per the tax-slab of the pensioner.
Decision
Both EPF and NPS aim to secure the post-retirement life of the employee. NPS score higher in terms of returns while EPF score higher in terms of taxation.
So, for conservative investors, keeping both NPS and EPF in basket and enjoy tax benefits of both i.e. EPF contribution u/s 80C and NPS contribution u/s 80CCD(1B) is advisable while for aggressive investor EPF is must but NPS can be replaced by directly investing in stock market with ELSS Funds.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. IDFC Tax Advantage (ELSS) Fund
4. ICICI Prudential Long Term Equity Fund
5. Religare Tax Plan
6. Franklin India TaxShield
7. DSP BlackRock Tax Saver Fund
8. Birla Sun Life Tax Relief 96
9. Reliance Tax Saver (ELSS) Fund
10. HDFC TaxSaver
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For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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