Saving Schemes

Key Highlights in Transferring Your EPF Balance to NPS

The Employees’ Provident Fund Scheme (EPF) was first introduced in India in the year 1952. It is a retirement benefits scheme which requires both the employer and the employee to contribute a certain amount of money each month till the employee’s career status is active. It provides tax benefits along with a higher rate of interest in comparison to other schemes.

What is NPS?

The government of India has introduced National Pension System or NPS. It is a retirement benefit Scheme made to facilitate a regular income after retirement (post-retirement) to all its subscribers. PFRDA¹, or Pension Fund Regulatory and Development Authority, is the allocated governing body for NPS.

Difference between EPF and NPS

The National Pension System/NPS and Employees’ Provident Fund/EPF are usually the go-to options among Indian Citizens for retirement plans. These two schemes serve almost similar purposes yet are quite distinctive in features and objectives. Employee Provident Fund or EPF is a mandatory deduction made from your salary with an objection to creating a retirement corpus for you. Therefore, the sum that you will receive on your retirement will be tax-free. On the contrary, NPS is a voluntary practice of accumulating a certain amount from your salary for the purpose of one’s post-retirement relaxation.  

NPS allocating your fund

Employees’ Provident Fund further invests your EPF funds in government bonds, securities, debt securities, etc. Over the last three years, EPF has offered an annual rate of interest of 8.5%; however, NPS, on the contrary, does not offer any guaranteed return to its subscribers. According to the FY16 Annual Report of the NPS Trust, from the time of inception, the return offered by NPS under the various schemes has ranged from 7.86% to 14.30%.

EPF & withdrawals

If an employee who is registered under the EPF (holds EPF Account) terminates the employment contract and does not take any employment with such employer who is not registered under EPF as an employer, then in such a scenario, the complete fund amount in EPF is eligible to be withdrawn. This is a profitable move from an employee’s standpoint as it generally provides easy liquidity to the employees. These employees can use availed funds to either start a business or use it for any sort of personal reasons.

Things differ in NPS as an employee whose age is 60 years or older is allowed to withdraw only up to 60% of gross fund balance in a lump sum, whereas the rest of the fund amount goes to an annuity plan (for monthly pension). If an employee chooses to withdraw his EPF before even completion of 5 years of services, tax will be deducted from the EPF balance. If the employee is withdrawing more than INR 50,000, then tax will also be imposed in the form of TDS. Before October 2016, the limit for tax-free withdrawal amounts was INR 30,000. However, according to the latest EPF rules, the tax-exempt amount for withdrawal has been extended to INR 50,000.

Transferring EPF balance to NPS

• The concept of transferring balance to a National Pension System (NPS) tier-1 account from the Employees Provident Fund (EPF) was proposed in the Budget 2015, which allowed employees to choose from either NPS or EPF. The Pension Fund Regulatory and Development Authority, or PFRDA, allows its subscribers to transfer their funds to an NPS account from a recognized EPF account under several conditions.
• It is important to note that the transfer to NPS from EPF balance is completely tax-free, under the condition that the employee has served for five years or more continuously. If an employee or EPFO subscriber intends to withdraw more than INR 50,000 before prescribed years of continuous service, it should be noted that there will be a deduction on the amount in the form of TDS. 
• On the other hand, NPS offers various types of funds such as Ultra-safe, Balanced, Conservative, and Aggressive) to match the needs of various types of investors. An investor tends to select the fund type according to his/her risk profile.
• PFRDA, which is the regulatory authority for the administration of the National Pension System, has allowed the transfer of EPF balance to NPS through a circular.
• Under NPS, a subscriber may enjoy tax profits on annual investments of a maximum of INR 1.5 lakh according to Section 80C and the additional benefit of up to INR 50,000 according to Section 80CCD(1B) of the Income Tax Act.

How to Transfer?

Step 1: Create an NPS (Tier-1) account. You may create this account online using the eNPS portal or ask your employer to open an NPS account for you, or you may create an account using PoP (Point of Presence). PoPs are generally banks or any such other entities which are registered as PoPs with PFRDA.

Step 2: Once the account is opened, you have to send the employer your transfer form, which will then be sent to the concerned EPFO nodal branch for the purpose of initiating the transfer of balance from EPF to NPS. Once the request is received, EPFO will initiate the balance transfer in the EPF account. A cheque or draft either in the name of the nodal office of NPS (for a government employee) or in the name of the PoP collection account (for a non-government employee) will be issued by the retirement body.

Step 3: A letter will be issued to the employer by the Nodal EPFO officer mentioning the balance being transferred to the NPS tier 1 account (of the employee). Once the fund is received, your NPS account will be updated.

Step 4: As per your fund’s selection, NPS will invest your amount. You may opt for a maximum of 50% allocation to equity instruments and remaining in debt schemes. NPS returns vary between 7.5% and 14%, according to the fund selection and market condition, unlike that of EPF, which provides fixed returns annually.

Why to Transfer?

• Sometimes, NPS investments are measured to give better returns in comparison to those of EPF. Over the last decade, the calculated average return of NPS funds has been found to be around 10% if an employee allocates 50% of their NPS input to equities and the remaining 50% to government securities. On the contrary, the calculated average for EPF returns in the past decade is an interest rate of 8.5 per cent.
• Under the influence of such return rate differences in both retirement schemes, many subscribers may choose their EPF account balance to be transferred to NPS accounts. This turns out to be a good choice as, considering factors like the inflation rate, it is important to have adequate equity exposure to gain good returns on long-term financial goals such as retirement planning.
• Apart from higher returns, extra tax benefits of INR 50,000 are availed by an NPS investor in terms of tax deduction according to section 80CCD (1B) when invested into an NPS account. This aforementioned deduction is in addition to the INR 1.5 lakh deduction according to Section 80C of the Income Tax Act.

Tax and benefits

• EPF Withdrawals are entirely tax-free, owing to the condition that the employee has served continuously for the same employer for five years or more.
• Withdrawals from NPS are tax-free only if they are within 60% (which was 40% until FY 2018-19) of the gross amount.

EPF has been proven to be beneficial for employees as it is considered to be a retirement savings scheme which provides assured returns. On the other hand, NPS has yet to gain popularity, although it is left time to decide whether it will gain popularity among the employees in the upcoming time.

Conclusion

Anyone moving towards retirement looks forward to generating a plan for post-retirement, which sometimes includes vacation, to-dos, and financial assistance. To safeguard any employee who has worked the finest amount of time in his life, the government provides two schemes, NPS and EPF, both of which allow the individual to generate a high return financial assistance for their old age. But sometimes, one scheme provides better returns than another. It is expected that one would like to have their balance in schemes with higher returns and more benefits. One such reason generates the need to transfer the EPF balance amount to NPS to enhance one’s retirement plans. However, this process of transferring needs knowledge of both the schemes to avoid any losses, inclusive of both pros and cons, such as which schemes give higher returns, which scheme gives more benefits, how funds are allocated, etc.

FAQs

1. https://www.pfrda.org.in/