EPFO vs NPS: Do you want more pension or complete security? The difference between EPFO and NPS is so deep that the right choice can change your entire retirement planning. Understand which is better with the help of figures and calculations.
EPFO vs NPS: Two savings schemes are very popular for retirement in India – National Pension System (NPS) and Employees Provident Fund Organization (EPFO). Both aim to provide regular income after retirement. But, there is a big difference in their structure, investment method, eligibility and method of getting pension.
Let us know what is the main difference between NPS and EPFO and which scheme will be best for you.
Who can invest?
Under EPFO, the employee whose basic salary is ₹ 15,000 or less is compulsorily covered. However, employees earning more than this can also voluntarily contribute to EPF, as is the case in most corporate sectors. Under this, contribution of both the company and the employee is mandatory.
People who started working after 1 September 2014 and whose basic salary is more than ₹15,000 are not eligible for Employees’ Pension Scheme (EPS). In such cases, the entire employer contribution goes only to EPF. However, there may be some exceptions to this.
In contrast, NPS is completely voluntary. Any citizen of India, even Overseas Citizen of India (OCI), can join it till the age of 70 years. Companies give this option to their employees under Corporate NPS.
Who contributes how much?
| Aspect | EPFO | NPS |
|
Employee Contributions
|
12% of salary in EPF |
Voluntary; minimum ₹1,000 per year
|
| Employer’s contribution | Total 12%: 3.67% EPF, 8.33% EPS |
Voluntary; both employees and employers can contribute
|
| Government contribution | 1.16% in EPS | Wouldn’t have |
EPFO vs NPS: How much tax exemption is available?
In both EPFO and NPS, the employee gets tax exemption on his contribution. In EPFO, this exemption is available under Section 80C, while in NPS, along with 80C, an additional ₹50,000 exemption is also available under Section 80CCD (1B). Overall, an employee can get tax benefit of up to ₹2 lakh in NPS.
At the same time, there is a common limit for tax exemption on employer’s contribution. If the employer contributes more than ₹ 7.5 lakh annually to EPF, NPS and Superannuation, then the excess amount is considered taxable. This limit applies in both the old and new tax systems.
Where is your money invested?
About 90% of EPFO ‘s money is invested in government bonds and debt instruments. Only 10% goes into equity, that too through exchange traded funds (ETF). On the other hand, if we talk about NPS, there are two options for investing in it.
- Auto Choice: The ratio of investment in equity, debt and government bonds is decided according to age.
- Active Choice: The investor can decide for himself how much money to invest where. Maximum investment in equity up to 75% and in debt up to 100% is allowed.
Calculation of returns and pension
EPF has given an average return of 8.65% per annum since FY 2001-02. Pension under EPS is determined by a fixed formula.
Pension = (Pensionable pay × Service years) ÷ 70
The maximum pension in this is only ₹7,500 per month, as it is based on the salary limit of ₹15,000.
Whereas NPS is completely market based. Its average return in government scheme has been 9.5% and in moderate risk scheme (Moderate Lifecycle Fund) it is up to 11%. In NPS, it is mandatory to invest at least 40% of the total corpus in buying annuity at the time of retirement. This provides pension every month.
Understand with an example
If an employee contributes to EPFO or NPS from 1995 to 2024 on a monthly salary of ₹50,000, the figures at the time of retirement will be something like this.
| Criteria | EPFO | NPS @ 9.5% |
NPS @ 11%
|
| Lump Sum Corpus | ₹1.84 crore (EPF) | ₹2.23 crore | ₹2.99 crore |
| Monthly Pension / Annuity | ₹3,933 (EPS) | ₹50,352 (without ROP) / ₹45,181 (with ROP) |
₹66,582 (without ROP) / ₹59,744 (with ROP)
|
ROP (Return of Purchase Price) means that if the investor dies, the annuity amount purchased is returned to his nominee.
It is worth noting that if the same return (9.5%) was received on the EPF corpus, the total amount would have been ₹ 2.11 crores. But there is no difference in EPS pension, because it depends only on salary and service period and not on investment returns.
EPFO vs NPS: Which is best for you?
EPFO is a stable and secure pension model with government guarantee but limited benefits. NPS, on the other hand, offers more flexibility and potentially higher returns, but it depends on market performance.
For those who can bear the risk and want higher returns in the long term, NPS may be a better option. But those whose priority is a stable and assured pension can stick to EPFO.
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