Pension Fund Regulatory and Development Authority (PFRDA), the regulatory authority for administration of National Pension System (NPS), had recently issued a circular detailing the process for transfer of fund balance from Employees' Provident Fund (EPF) to NPS. This circular gives effect to a proposal made by the Finance Minister of India in his 2015 Union Budget speech allowing employees to opt for either EPF or NPS.
The employees who are interested in getting their EPF funds transferred to NPS should have an active Tier 1 NPS account, whether through the employer or otherwise – corporate model or all citizen model. The employees are required to approach the EPF through their current employer and request for transfer of fund balance from EPF to NPS account.
The fund balance so transferred from EPF to NPS will not be treated as income of the current year in the hands of employees. Also, the transfer amount will not be treated as contribution to NPS of the current year by the employee / employer and will not be eligible for deduction under Section 80CCD of the Act.
Although PFRDA has laid out the transfer process, many are doubtful whether the transfer will be possible as the EPF authorities have not notified anything as yet. As per the EPF Scheme, there are specific circumstances when EPF withdrawal is possible such as retirement on attaining 55 years of age, permanent and total disability, and migration from India, etc. Withdrawal from EPF for transfer of fund balance to NPS is currently not possible. Thus, to implement the Finance Minister's proposal, changes may be required in the EPF Scheme.
There would be a lot of questions in the minds of individuals when deciding whether they should transfer money from EPF to NPS. A comparison between EPF and NPS on various parameters such as asset allocation, returns, liquidity, tax benefits etc. may provide answer to some of these questions.
Asset allocation / investment
EPF invests majority of its funds in government securities, bonds, debt securities and only a small portion in equity instrument. NPS, on the other hand, is allowed to invest up to 50% of its corpus fund in equity instrument. Further, NPS provides flexibility to individuals to choose their fund manager and asset portfolio.
EPF accrues annual interest on the fund balance at notified rate for each year - in the last three years, the rate has ranged from 8.75% to 8.80%. In comparison to this, NPS does not offer any guaranteed return to its subscribers. As per the Annual Report issued by NPS Trust for the Financial Year 2015-16, since inception, the return offered under its various schemes has ranged from 7.86% to 14.30%.
Liquidity / withdrawal
If an employee terminates employment and does not take up another employment within 2 months with an employer who is registered under EPF, entire fund balance in EPF can be withdrawn in lump-sum. This provides easy liquidity to an individual who may want to use the EPF funds for start-up business venture or other needs. However, from NPS, an employee who is below 60 years of age can withdraw only 20% of fund balance in lump-sum. The balance goes to an annuity plan from which employee receives monthly pension after retirement. An employee who is 60 years of age or more can withdraw maximum 60% of fund balance in lump-sum.
While withdrawal from EPF is fully tax-free provided the employee has rendered continuous services for 5 years or more, the lump-sum withdrawal from NPS is tax-free only up to 40% of the total corpus.
For employees, EPF has historically been the most favoured retirement savings scheme with mass coverage. NPS is yet to gain popularity among the employees. Both schemes have their pros and cons and the decision to opt for either is going to be a tough one for many.
While the Government is promoting NPS as the future of employee social security in India, NPS will still have to win confidence of many to get more subscribers.
(Views expressed are personal)
Originally published by Financial Express .
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