Is NPS a threat to EPF?

Written on Wednesday, August 5, 2015
By Team Bajaj Capital

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Few months back when Labor Ministry gave a hint that it might consider giving employees an option to switch from EPF to NPS, probably the first thing to strike our mind was a question- Would it be a right decision? Well, we thought of both the pros and cons of this move (if implemented). But before we get into the aspects, we need to understand what exactly these two schemes are. Both the schemes have been designed to support your financial needs, post retirement. 

EPF is the most popular investment for salaried individuals, and is maintained solely by the Employees' Provident Fund Organization of India (EPFO). As a rule, any company having more than 20 employees has to register with the EPFO. For those who have a basic salary of up to Rs. 6500, contributing to the EPF is mandatory. While National Pension Scheme (NPS) is a definite contribution retirement scheme, under NPS a consumer will invest a pre-defined amount every month in a fund picked by him/her and at the time of retirement he will receive a lump sum amount subject to the performance of selected fund.

Taking a look at the fund distribution, EPF amount is majorly invested in government securities but recently EPFO has decided to invest 5-10 % sum in equities too. While the decision is wise but still the percentage of investment in equities is quite low. On the other hand, under National Pension Scheme, employees get an option to invest up to 50 percent of their fund in stock markets, which has the probability of giving better yields in the long term. NPS allows need based asset allocation. Investors have the freedom of going for stocks, government bonds and other securities as their asset choice. But the equity investment cannot exceed 50 percent of the sum.

EPF will remain a popular choice for salaried professionals due to the superior taxation benefits. If you are earning a good amount every month, you can go for investment in NPS too, but if you are finding NPS lucrative only due its exposure to equities then consider investing in mutual funds as it offer more benefits in terms of taxation and withdrawal. 

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