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The Employee Provident Fund and the National Pension Scheme are retirement plans that encourage individuals to save for their later years. The EPF and the NPS have their unique features and suit different kinds of investors.
Retirement planning is an essential element of financial planning for every individual. For this purpose, there are several retirement plans in India, of which the Employee Provident Fund (EPF) and National Pension Scheme (NPS) are primary.
Since both EPF and NPS are retirement schemes, and they have their own unique features and benefits, it is necessary to understand them in detail when making a choice for your investment portfolio.
Therefore, here is a detailed explanation of both and a comparison between EPF and NPS to help you select the best retirement plan for you.
What is EPF?
The EPF, or the Employee Provident Fund, is a kind of a saving-cum-investment account for salaried individuals.
It is a retirement scheme administered by the Government of India. The scheme caters to the financial needs of people employed in the organised job sector and their post-retirement financial requirements.
Under this scheme, you deposit a certain amount from your gross salary in your EPF account, and your employer deposits the same amount into your account. Upon retirement, you can withdraw the entire corpus comprising the deposited amount and the interest earned on it and use it as a retirement fund to meet your various financial needs.
What is NPS?
NPS, or the National Pension Scheme, is the pension scheme by the Government of India to encourage a habit of saving among individuals.
The NPS is not restricted to only employees of the organised job sector. Individuals, except those employed with the Indian armed forces, can invest in the NPS scheme to secure their post-retirement life.
The funds you invest in an NPS scheme get invested in various market-based financial instruments, and the returns on such investments are added to your corpus. Upon maturity, you can withdraw a part of the corpus as a lump sum and can have the remaining amount as an annuity plan.
However, you cannot withdraw more than 40% of the accumulated corpus as a lump sum withdrawal amount. On the other hand, you can use the entire corpus to buy an annuity plan if it suits your investment needs.
Difference Between NPS and EPF
Parameter |
National Pension Scheme |
Employee Provident Fund |
Nature |
Voluntary scheme for individuals. |
Mandatory scheme for all establishments with 20 or more employees with a basic salary of less than ₹15,000 per month. For employees with a higher salary, it is voluntary. |
Minimum Investment Required |
₹6000 per annum for the NPS Tier 1 account. |
12% of the basic salary + dearness allowance |
Return on Investment |
Returns are dependent on the equity allocation of the funds. |
Guaranteed and fixed returns. |
Treatment of the Maturity Value |
Up to 40% can be withdrawn as a lump sum upon maturity, and the rest must be invested to buy an annuity scheme. |
The entire maturity amount can be withdrawn when you attain the age of 58. |
Withdrawals |
You can withdraw up to 25% of the contributed amount for genuine reasons after completing the 3-year mandatory lock-in period. |
You can withdraw up to 75% of the corpus if you stay out of employment for a period of one month or more or for a genuine reason. |
Tax* Implications |
Self-contribution of up to ₹1.5 lakh and an additional contribution of up to ₹50,000 are tax exempted. 60% of the maturity amount accumulated is tax-free. |
EPF contributions of up to ₹1.5 lakhs are tax-free, and there is no tax applicable on withdrawals or interest earned. |
Flexibility |
You can control how your funds are distributed for the purpose of investing in various asset classes. |
You have no control over how the funds are allocated. |
Risk on Investment |
NPS investment is market-linked. Therefore, it comes with a certain amount of risk. |
The EPF scheme is government-backed. Therefore, it is a relatively safer investment. |
Which is better: EPF or NPS?
Both EPF and NPS have a common goal of encouraging an individual to save for retirement.
EPS is a government-backed scheme and provides a guaranteed* rate of return. On the other hand, the NPS is a voluntary scheme, and the returns are market-linked$. Your investment in NPS is riskier than an EPF investment, but it also has the scope of offering better returns.
NPS allows you to choose the asset classes where your funds will be invested so that you can actively be a part of your investment journey. Such freedom is not available with the EPF scheme. However, the returns from an EPF scheme are tax-free.
Therefore, you must analyse your investment goals, market knowledge, nature of employment, and tax liability before selecting either of the schemes.
Wrapping Up
The Employee Provident Fund is a government-backed retirement scheme under which an employee from the organised sector invests a part of his income into the EPF account. The employer contributes the same amount to the employee’s account, thus helping him build a corpus for a comfortable post-retirement life.
On the other hand, the NPS is a voluntary retirement plan under which any individual, except for an individual employed with the armed forces, can invest funds and earn returns over the long term for retirement purposes.
You can choose between NPS and EPF based on your investment needs, nature of employment, risk-taking ability, and tax liability. You can also research and explore other types of retirement plans and choose the ones that best suit your needs and financial situation.
