EPF vs NPS: Who should move from EPF and who should stay put

There are several problems under the EPF hood, but our survey shows that a large majority of subscribers would not switch to the NPS even if they had the option. Though the NPS is very transparent and offers greater flexibility, less than 14% of respondents would switch to the pension scheme.

The biggest reasons for staying with EPF are obviously the tax advantage that the scheme has over the NPS. In the NPS, the investor can withdraw 60% of the corpus tax free on maturity but the remaining 40% is compulsorily invested in an annuity to earn a monthly pension that is fully taxable as income.

For many investors, this requirement of putting 40% of NPS maturity proceeds in an annuity is a deal breaker. Others are appalled that the monthly pension from annuity will be fully taxed even though it is a mix of the principal and the gain.


If given the option, will you move from EPF to NPS?

Who should move from the EPF
Though the love for the EPF is overwhelmingly universal, younger subscribers to the scheme, who have more than 20 years to go for retirement, are slightly more inclined to join the NPS than older people whose retirement is less than 10 years away.

Young people should keep in mind that the demographics of India are gradually changing. In a few decades, there will be more older people than young. The Employees’ Pension Scheme will be the first to feel the heat when beneficiaries drawing pension from the scheme outnumber the new joinees contributing to it.

Older subscribers love EPF more

Unless the problems facing the EPF are addressed, the scheme is headed for trouble and younger people should consider moving out to the more transparent and better managed NPS. The NPS also offers them the potential to earn better returns than the EPF which has a very small portion of its corpus in equities.

Also Read: Portion of EPF corpus is invested in equities: Is your EPF money safe?

Why investors won’t shift from EPF…

...and who should stay put
On the other hand, shifting from EPF to the NPS is not the best option for people who are going to retire soon. Experts says it just doesn’t make sense to switch from an option with a tax-free corpus to a scheme where 40% of it will earn taxable income. These people are better off in the EPF.

… and why some consider NPS a better option

However, do keep in mind that even if the entire EPF corpus is tax free on maturity, the income that it will generate is fully taxable. Whether that money is invested in a fixed deposit or mutual fund or Post Office scheme, the income it will generate will be taxed. Yes, senior citizens do enjoy a Rs 50,000 exemption for interest income under Sec 80TTB. But beyond that, there is no difference.

The NPS only makes the retiree compulsorily put 40% in an annuity. This ensures that the money is not squandered on other expenses and secures a dignified retirement by providing a fixed pension for life. Seen from this perspective, the annuity is actually a blessing in disguise.

(*% won’t add up to 100 due to multiple responses | The online survey was conducted on 11-13 Sept and received 4,753 responses.)