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The National Pension Scheme (NPS) is a retirement benefit plan that combines tax savings and pension payments. The pension amount depends on the asset classes and the fund manager’s performance. The National Pension System offers the following two types of accounts, Tier 1 and Tier II. On the other hand, the Employees Pension Fund (EPF) is one of India’s most popular savings systems. EPF helps individuals accumulate an adequate retirement fund. Each month, the employee and employer contribute 12% of the employee’s basic wage (Basic + Dearness allowance) to this fund. This article briefs the key differences between NPS vs EPF.

Difference Between NPS and EPF

Following are the key differences between NPS vs EPF:

Basis of DifferenceNPSEPF
Investment ContributionNPS has two investment modes: active choice and automatic investment.
Investors in the active choice option have up to 50% of their portfolio in equity, with the remainder in medium- or low-return fixed income instruments.
The auto choice mode determines asset allocation on the basis of the contributor’s age.
Equity exposure for government employee contributions is 15% in the Tier 1 account.
EPF contributions are invested in securities issued by the Central and State governments.
Additionally, investments are made in PSU bonds and deposits.
Market conditions do not have an impact on the contributor’s pension.
Annual compounding interest on EPF deposits will be paid to contributors even if bond and security yields are flexible.
ReturnsNPS returns vary according to the stock and bond market movements. NPS results also vary according to the mix of investments and exposure to equity and debt.
The average return on NPS investments is around 9% to 12%.
The average EPF returns are around 8% to 8.50%.
WithdrawalsThe contributor cannot withdraw funds until they reach the age of 60.
Partial withdrawal is permitted if the contributor invests at least 80% of their NPS assets in an annuity plan.
After the age of 60, withdrawals demand a 40% investment in an annuity.
Withdrawals are permitted under following conditions:
A member may withdraw up to six times their annual pay for medical treatment.
A member may withdraw up to 36 times their earnings to repay a home loan.
You may withdraw up to 24 times your annual wage to acquire a site or block of property.
A member may withdraw up to 12 times their annual pay to repair and remodel their home.
Contributions of up to 50% may be withdrawn up to three times for marriage or schooling.
Income Tax Benefits and DeductionsUnder Section 80C of the Income Tax Act, 1961, investments up to Rs 1,50,000 each financial year are tax-deductible. Additional investments up to INR 50,000 are tax-deductible under Section 80CCD (1B) of the Income Tax Act, 1961. Also, the entire pension fund balance is tax-exempt on maturity.Contributions are tax-deductible under Section 80C. Interest and withdrawals are also tax-free. No further benefits are available apart from Section 80C deductions.

NPS vs EPF – Which is Better?

Whether to invest in EPF or NPS depends on the investor’s investment goals and risk tolerance levels. Both the investments are suitable for retirement. However, EPF offers a guaranteed rate of return, whereas NPS is market-linked. Thus NPS is riskier than EPF. NPS allows you to choose from a variety of investment options, whereas EPF returns are tax-free. Therefore, if you are seeking tax-free returns, EPF may be a suitable option. Thus, NPS will be a suitable option if you are looking for slightly higher returns and are comfortable with undertaking certain risks.

Conclusion

NPS and EPF both are good investment options for retirement. If you are an investor who wishes to get stable returns, then you can invest in EPF. However, NPS is your option if you are willing to undertake some risk and invest in market-linked instruments. Therefore, analyze your risk profile and investment requirements and choose a suitable option. Alternatively, you can invest in both if you so wish!

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