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In Budget for 2015-16 Finance Minister Arun Jaitley had promised that employees can move their retirement savings to the National Pension System. In Dec 2019, It was decided that PF and NPS are not alternatives to each other and hence the plan to move EPF to NPS was junked. The PFRDA notified the procedure for EPF members to transfer their investments to the National Pension System or NPS on 6 Mar 2017. This article talks about proposals for transfer of EPF to NPS in Budget 2015-16, Requirements for transfer of EPF to NPS and How to transfer EPF to NPS. It then does a comparison of EPF and NPS and then answers the question should you transfer EPF to NOS.

EPF cannot be transferred to NPS

The National Pension System (NPS) will NOT be an alternative to the Employees’ Provident Fund (EPF), as the government is set to junk its much-talked-about plan to put in place EPF account portability with NPS. As per the decision in Dec 2019.

All central trade unions, including Rashtriya Swayamsevak Sangh affiliate Bharatiya Mazdoor Sangh (BMS) have been opposing the plan for four years. In October 2019, BMS criticized the central government, terming the “latest draft Social Security Code, 2019, totally disappointing for the workers in the country”. BMS President C.K. Saji Narayanan had said that there is no alternative to EPF from workers’ benefit point of view and his organization totally opposes the NPS and EPF interoperability.

The EPF is completely a tax-exempt scheme. It offers provident fund, pension, insurance, and disability benefits, among other things, but NPS does not have such mass benefit. EPF with more than 8.6% almost assured return from its own investments without any government contribution makes it a far better product. What it needs is a smoother online interface and work is on to achieve this.

Authorities believe that while EPF is a statutory deduction scheme for all organized sector employees in any establishment having 20 or more employees, NPS is voluntary. Besides, while EPF deductions are 12% each for employees and employers, NPS deductions are 10%.

Budget 2015-16 and transfer of EPF to NPS

For Transfer of EPF to NPS Budget 2015-16 had suggested

  • EPF subscribers can make a one-time switch to the NPS.
  • Within 30 days of applying, the entire balance in his EPF account will be transferred to the NPS.
  • Opting for the NPS would also mean the individual exits from Employees Deposit Linked Insurance as well as the Employees’ Pension Scheme (EPS).
  • Once he shifts to NPS, the employee will have a one-time chance to return to the EPF fold.

In EPF, 24% of an employee’s salary is diverted to the EPF as a mandatory retirement saving scheme.  There is no clarity on how the amount mandatorily deducted from the employer’s contribution and put into the EPS will be invested. But we guess it would also be invested in NPS like Government employee.

Requirements for transfer of EPF to NPS

  • To transfer EPF to the NPS, one should have an active NPS Tier-I account.
  • One can open NPS account through the employer, through eNPS portal, or physically through Points-of-Presence or POP(i.e, banks or any entities registered as PoPs with PFRDA). Our article eNPs:How to open NPS account talks about how to open an NPS account.

Tax Implications of transfer from EPF to NPS

  • The amount transferred would not be treated as income of the current year so Transfer income would not be taxable.
  • The transferred recognised Provident Fund/Superannuation Fund will not be treated as contribution of the current year by employee/employer and the subscriber would not make Income Tax claim of contribution for this transferred amount.

How to transfer EPF to NPS

  • An individual, either a government or private sector employee must get in touch with his/her concerned PF office through the employer and should make a request to transfer their savings to an NPS account.
  • The recognized Provident Fund/Superannuation Fund Trust will then initiate transfer of the Fund.
  • In the case of a government employee, the recognised Provident Fund or the superannuation fund can issue the cheque or draft in the name of:
    • a) In case of government employee: Nodal Office Name (PAO or CDDO Name) <> Employee Name<> PRAN (12 Digit No.)
    • b) In case of subscriber presently under private sector including All Citizen Model:  POP (Name of the POP) Collection Account-NPS Trust<>Subscriber Name<>PRAN (12 Digit No.)
  • The employee should request the recognised provident fund/superannuation fund to issue a letter to his present employer mentioning that the amount is being transferred from the recognised provident fund/superannuation fund to be credited in the NPS Tier I account of the employee which would be recorded by the present employer or POP as the case may be, while uploading the amount.

Comparing EPF and NPS

Switching your EPF contribution to  NPS scheme is basically trading in an investment with assured returns, for investments with varying exposure and returns (but you also get an additional tax exemption with NPS). While the return on EPF savings this year is expected to be around 8.5%, the NPS offers multiple asset allocation options and fund managers for its members to choose from, with varying rates of returns. Returns of NPS. Our articles All about NPS and EPF cover the topics in detail.

Table comparing EPF and NPS is given below

Description EPF NPS
Who can invest Only a salaried individual can contribute towards EPF. Anyone up to the age of 60 years can contribute towards it.
How to invest? A salaried individual automatically starts contributing to EPF. There is provision to opt out of this but that declaration needs to be made at the beginning of the career. For NPS, all you have to do is subscribe to it and ask your employer to deduct a fixed amount every month or year.

Or make your own contribution

Investment cost Investment in EPF is free of cost. There are minimal  administration charges The NPS charges fund management fees of 0.0102% for the government employees and there’s a ceiling of 0.25% for the private sector.
How much can one invest An employee has to contribute at least 12% of his basic pay towards EPF.

The employer contributes an equal amount towards your EPF corpus Of this, 8.33% goes in EPS, subject to a maximum of Rs 1250 a month.

Thus, at least 24% of your basic pay is invested in EPF. You can always invest more than the mandated 12% towards EPF through Voluntary Provident Fund

The minimum investment towards NPS is Rs 1,000 a year.(It was earlier 6000 Rs)
Where does the product invest EPF invests in government securities or bonds issued by government-owned companies. A very minimal portion is invested in equities or stock markets. These are safer products. NPS is allowed to invest up to 50% of its corpus in equities. 

 NPS also has the option to rejig its portfolio as per the investor’s age.

Assured Returns  The EPFO revisits its returns annually. But once fixed, it pays the same interest all year through. To that extent, EPF gives assured return. Returns are from 8-8.5% Due to investment in equity does not allow NPS to offer guaranteed returns
How much can one earn? The average EPF rate of returns is between 8.00% – 8.50% p.a.

But the EPS portion does not earn any interest.

  • NPS returns vary based on the market conditions for stocks and bonds.
  • NPS returns also vary depending on the ratio of investment options and exposure to equity, medium fixed income securities and low fixed income securities.
  • Average returns for NPS investment of 85% in fixed income securities, and 15% in equities is:

2012 – 2013: 9.76%

2013 – 2014: 5.37%

2014 – December 2015: 19.63%

Premature withdrawal EPF allows premature withdrawal for specific purposes (house construction, child’s marriage, and illness), without foreclosure. However, EPS portion of EPF can be withdrawn only for nine years of service and till the age of 50, that too partially. If you’ve worked for over ten years then you are liable for pension. Our article EPF Partial Withdrawal or Advance discusses it in detail. NPS also allows premature withdrawal. partial withdrawals under the National Pension System as opposed to the earlier rule which stated withdrawal only on maturity. One can only avail of this offering after being enrolled in NPS for minimum 10 years, and withdrawal can be up to a maximum of 25% of the contribution. Our article Facts about Partial Withdrawal of NPS Corpus discusses it in detail.
Tax deduction under 80C during investment An employee’s contribution of only up to 10% of the basic and dearness allowance is eligible for deduction under Section 80CCD (this amount is within the Rs 1.5lakh limit, under Section 80C).

 

 

Section Deduction allowed Maximum Limit Can be claimed by
80CCD(1) Employee contribution up to 10% of basic salary and DA Upto 1.5 Lakhs including 80C. Employees. For self-employed 10% of their annual income up to a maximum of Rs 1.5 Lakhs.
80CCD(2) Employer’s contribution up to 10% is basic salary and DA. Upto 10% of basic salary and DA. Only employees.
80CCD(1B) Additional tax benefit up to Rs. 50000 over and above the benefit under 80CCD(1). Upto Rs. 50000 Employee( Government or private) or self-employed 
Tax on Pensiom The pension earned after retirement is taxable at slab rate both for NPS and EPS. The pension earned after retirement is taxable at slab rate both for NPS and EPS.

Should you transfer EPF to NPS?

No because

  • Currently, there is no other scheme that gives an assured return of around 8% and that too tax-free. EPF contribution happens before salary comes to the bank account so it is compulsory saving for retirement.
  • You can open an NPS account and contribute to it at a personal level. So you end up having best of both the world.

If 12% employer contribution which mostly goes into EPS and ESIC also gets diverted into NPS(there is no clarity but would be as in case of Govt employee) you will end with more investment for retirement.

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