Labour Minister Bandaru Dattatreya recently indicated that the government may soon seek Parliament’s nod for amending the Employees’ Provident Funds (EPF) Act. The amendments may include allowing employees an option to switch to the National Pension Scheme (NPS) from the EPF scheme for retirement benefits.
NPS, introduced in 2004, is a voluntary pension scheme and is regulated by the Pension Fund Regulatory and Development Authority.
Financial planners say the government needs to make NPS attractive in terms of taxation to make it a popular choice for employees. Currently, maturity proceeds from NPS are subject to taxation unlike EPF. (EPF withdrawals are taxed only if an employee has not rendered continuous services for five years or more).
Anil Rego, CEO of Right Horizons, a wealth management firm, says investors will be better off if employees continue with EPF because of tax incentives.
EPF money is mainly invested in government securities. On the other hand, under NPS, employees get the option to invest up to 50 per cent of their kitty in stock markets, which has the potential of giving better returns in the long term.
Suresh Sadagopan, founder of Ladder 7 Financial Advisories, says if investors want to take exposure to equities they can do it through mutual funds that offer more benefits in terms of taxation and withdrawal.
Subscribers can exit from NPS upon attaining the age of 60 but at least 40 per cent of the accumulated pension wealth of the subscriber needs to be used for purchase of an annuity from a pension provider. If subscribers exit before attaining the age of 60, they have to use at least 80 per cent of the accumulated wealth for purchase of annuity.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, says employees with very little equity investment can look at NPS and the potential higher returns could have negative tax impact. But employees who already have sufficient equity exposure through instruments like mutual fund can continue with EPF, he added.
In comparison to EPF, NPS offers the option of selecting the asset allocation based on one’s needs. Under NPS, investors have the option for choosing stocks, government bonds and other securities as their asset choice. But the equity part of the allocation cannot exceed 50 per cent.
Mr Dhawan says clarification is also needed if the additional tax deduction of Rs 50,000 allowed on NPS (under Section 80CCD) this year would be applicable if it is opted for, instead of EPF. In many cases, employees exhaust their Section 80C limit of Rs 1.5 lakh on products like insurance, home loan, PPF, and tuition fees and are unable to get tax benefits of EPF investment, says Mr Dhawan. (Under the current tax laws, employee contributions under EPF can be claimed under 80C).