Difference between NPS and EPF - which one should you opt for?

In Indian scenario, NPS (National Pension Scheme) and EPF (Employees Provident Fund) are two viable options for ensuring a financial cover in the absence of a regular income or as a corpus that can be used in times of need. 

However, not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

Find out how they differ from one another:

CriteriaNational Pension SchemeEmployee Provident Fund
A/C openingMandatory only for government employeesMandatory for every establishment employing more than 20 or more employees
EligibilityAge: 18-65 (Indians + NRI) - can be opened by anyoneOnly for salaried Individuals
InvestmentIt is a market-linked product. Its performance depends on the equity and debt marketThe Central Board fixes the interest rate for the year - government debt investment. 
Tax BenefitTax deduction of INR 2 lakhs under section 80C and  CCDYou can avail tax deduction of INR 1.5 lakhs under section 80C
Fund ManagerLiberty of choosing your fund managerDo not have the liberty of choosing a fund manager. The funds are invested by EPFO
Min Investment500/ year12% of salary per month or 1800, which can be increased voluntarily. 
Max investmentUnlimitedUnlimited (however, taxability varies)
Return8%-15% ( depending upon which funds you are investing your money in)8.5% (Interest as on September 1, 2020)
Lock in period & ExtensionAge: 60

Extension: 70

Age: 58

Extension: 60

Premature WithdrawalPartial withdrawals can be made up to 25% of the subscriber’s savings, but only after the 10th year of subscription.Partial withdrawal is allowed after 5 years of EPF when you fulfill certain conditions such as buying a new house, marriage, child education, sickness, death, etc. 
WithdrawalYou will get 60% of the corpus and 40% will be invested in an annuity for a monthly pension.

Read here- to know more

You will get the entire corpus after retirement.
Expense Ratio0.01% (also varies - it is  not fixed)0% (No expense ratio)
RiskLow risk (Market Dependent)No-Risk
Employer ContributionCan be doneEmployees along with the employers both contribute 12% of the employee’s basic wages towards EPS

Let’s assume, two friends Sanjay and Yogesh started saving for their retirement in 2021. Both of them are 23-years-old and want to retire at 60. Also, they plan to continue this investment until 2058, at the time of retirement. However, Sanjay has invested in NPS and Yogesh in PPF.

NPS vs PPF: Difference in the retirement corpus
Investment Product pickedNPSEPF
Average annual return12.90% (Growth profile)8.5%
Investment amount every monthINR 10000 (10% of Basic salary & DA)INR 12,000 (12% of Basic salary & DA)
Investment time period37 years37 years
Investment in 37 yearsINR 44.4 lakhsINR 53.28 lakhs
Retirement corpusLump-sum value: INR 7.33 crore

Annuity Value: INR 4.89 crore

INR 1.44 crore

NPS is devised as a pension scheme. So, you get to withdraw 60 percent of your accumulated corpus at retirement without paying any taxes. The remaining 40 percent must be converted into an annuity instrument (from an insurance company) and get monthly payments.

The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for EPF has been decreasing. At the same time, there are chances that NPS can give you more returns in the future (where the equity markets perform well) w.r.t a higher risk of the equity exposure in NPS. So, while they reach their retirement age, there is a probability that this difference might increase further. 

Wealth Cafe Advice

Opting for EPF or NPS is a matter of choice based on specific needs and projected requirements. Both come with their set of merits and demerits. Subscribers at an early age or with risk-bearing capacity should subscribe to NPS and opt for equity allocation based on their risk profile to accumulate large corpuses targeted to fund retirement needs. Where you believe your risk-taking capacity is not very high and you will find it difficult to manage NPS post-retirement - EPF has always been a classic option for your investments. 

However, in both scenarios, investors should not touch their retirement corpus for other financial goals. You should always mark these investments only for retirement.

To know more about EPF and NPS you can read the following articles:

Spread the love

Leave a comment

Wealth Cafe Financial Services Pvt Ltd (formerly 'Wealth Cafe Financial Advisors Pvt Ltd') is a AMFI registered ARN holder with ARN -78274.

Wealth Cafe Financial Services Pvt Ltd (formerly 'Wealth Cafe Financial Advisors Pvt Ltd') is a SEBI registered Authorised Person (sub broker) of Motilal Oswal Financial Services Ltd with NSE Regn AP0297087003 and BSE Regn AP0104460164562.


Copyright 2010-20 Wealth Café ©  All Rights Reserved