Why the push for NPS instead of EPF
Since the central government wants to move away from the erstwhile defined benefits schemes of pensions to the system of benefits based on defined contribution there is a push from the government for NPS, which is evident from the fact that the government has moved the employees who have joined after January 2004 to NPS.
There are many reasons for this push. Under the former system, the contributor is assured a minimum amount of pension irrespective of the amount contributed by him. However, under the defined contribution system which is in built in NPS, the employee is entitled to the benefits based on the corpus created in his account out of contributions made by him and his employer. The system of defined benefits puts additional burden on the employers whereas the defined contribution system stops the cross subsidisation prevalent under the defined benefit scheme.
Who can have these schemes
For having an EPF account, you need to be employed with an eligible employer who has the EPF scheme implemented in his organisation. So, unless you are employed you can't have an EPF account. However, there is no restriction on you continuing your EPF account after your retirement, but you can't contribute after your retirement to your EPF account.
There is no age limit for opening and continuing to contribute to a PPF account. So, you can even open a PPF account after 60 years of age and continue well beyond 75 years of age as well. Any person whether employed or self employed can have a PPF account.
You can open an NPS account if you have completed 18 years of age and have yet to complete 60 years of age. Earlier, the NPS account holders were required to withdraw the money once reached the age of 60 years, however, under the revised rules the employee can postpone withdrawal for three years. Now, you have an option to extend your NPS account upto 70 years of your age and continue to contribute till then and thus extend the period for accumulation of the corpus.
The employers’ contribution to provident fund account of an employee is fully exempt upto 12 per cent of his salary without any absolute monetary limit. However, for NPS the employer’s contribution upto 10 per cent of the salary is eligible for deduction under Section 80CCD(2) without any limit. For the Central Government employees the eligible limit is 12 per cent. Under the EPF scheme the employer’s contribution can't exceed employee’s contribution but for NPS there is no such restriction for the employees who have NPS account. Under NPS the employer can contribute to NPS account of the employee without there being any contribution from employee. So, the NPS as a tax planning tool can be used excellently, by employer for their employees in highest tax slab. Say for example for a person with salary of Rs1 crore, the employer contribution of 10 per cent i.e. Rs10 lakh is fully eligible for tax deduction thus tax free in the hands of the employee. The contribution of Rs10 lakhs by the employer in this example will be treated as income of the employee, but for which the employee can claim deduction for whole of the amount under Section 80 CCD(2).
There is no percent wise ceiling on Employee’s own contribution towards EPF account which is eligible for tax deduction under Section 80C, but for NPS there is a cap employee’s contribution of 10 per cent of the salary eligible for deduction.
However, the self-employed can contribute and claim upto 20 per cent of their total income towards their NPS account. Employee’s contribution to EPF is eligible for deduction upto Rs1.50 lakh under Section 80 C. Likewise, contribution by salaried and self employed both qualifies for deduction upto Rs 1.50 lakh under Section 80 CCD(1). Both the deductions are subject to the overall ceiling of Rs1.50 lakh under Section 80CCE. Unlike EPF where the amount of deduction available is restricted to Rs1.50 lakh for contribution made by the employee, the tax laws allow an additional deduction of Rs50,000 for contribution made by the employee to his NPS account over and above the abovementioned ceiling of Rs1.50 lakh.
Under PPF rules the contributions made are deductible upto Rs1.50 lakh under Section 80 C. Anyone can open the PPF account whether working or not. However, unlike EPF and NPS where the deduction is available for contribution made to own account the deduction for PPF is available for contribution made to own account as well as the accounts of your children and spouse.
The interest accruing on PPF account is fully tax exempt whereas the interest earned on EPF account is tax free till one is employed and becomes taxable once you retire or no longer remain in employment.
Taxation of Corpus and restriction on withdrawal on maturity Under the NPS you can withdraw upto 60 per cent of the accumulated corpus which comes tax free in your hand and for the balance 40 per cent you have to mandatorily purchase an annuity from a life insurance company of your choice.
For EPF and PPF you can withdrawn the entire corpus on maturity or on reaching your age of superannuation which comes tax free in your hand without there being any obligation attached about the end usage of the corpus. So, under EPF and PPF there is no obligation to buy an annuity unlike NPS where you have to use minimum of 40 per cent of corpus for buying the annuity.
From the above discussion it becomes clear that though the PPF is better option from tax angle and is equally good option for non salaried employees, NPS still offer better scope for tax planning for higher salaried person. The answer to ultimate suitability will depend on individual’s situation.
The writer is a tax and investment expert and can be reached at firstname.lastname@example.org and on his twitter handle @jainbalwant