EPF vs NPS: Which is better for private employees? | EXPLAINED

EPF vs NPS: For private sector employees in India planning retirement savings, two key government-regulated schemes often compared are the Employees’ Provident Fund (EPF) and the National Pension System (NPS). Both are designed to help build a retirement corpus, but they differ significantly in structure, flexibility, risk, returns, and post-retirement benefits. Understanding these differences from official sources helps employees make informed choices.

What is EPF? (Employees’ Provident Fund)

The Employees’ Provident Fund Organisation (EPFO), under the Ministry of Labour and Employment, administers the EPF, a contributory retirement savings scheme for organised sector workers in India. EPFO also manages pension and insurance components linked with the scheme.

Key features of EPF include:

1. Mandatory participation for most salaried employees in the organised sector; monthly contributions from both employee and employer are made to the fund.

2. Fixed, government-declared interest: The EPF interest rate is ratified annually by the government. For example, the government fixed an interest rate of 8.25% for FY 2024-25. EPF is designed as a safe, predictable savings vehicle with government-guaranteed outcomes.

3. EPF combines three core components: the Provident Fund (PF) itself, the Employees’ Pension Scheme ( EPS), and Employees’ Deposit Linked Insurance (EDLI). PF serves as the main retirement corpus, EPS offers pension after retirement (subject to service and age conditions), and EDLI provides life insurance coverage.

4. EPF’s withdrawal and settlement rules are also evolving. Recent changes introduced by EPFO allow for more flexible and simplified partial withdrawals and revised final settlement timings for PF and pension claims while preserving funds for retirement.

What Is NPS? (National Pension System)

The National Pension System (NPS) is a voluntary, defined-contribution retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It was introduced by the Government of India in 2004 and extended to all Indian citizens on a voluntary basis.

Key features of NPS include:

1. Voluntary participation: Individuals (including private employees) choose to open and contribute to NPS.

2. Market-linked returns: Contributions are invested across asset classes, equities, government securities, and corporate debt, based on subscriber choice, offering potential for higher returns over the long term.

3. Flexibility and portability: The NPS account remains with the subscriber throughout career changes, including employer changes or self-employment.

4. NPS aims to help individuals build a retirement corpus that provides both a lump sum and a pension. Upon retirement, subscribers can withdraw a portion of their accumulated corpus and must use a defined portion to buy an annuity that pays a regular pension. Official regulations allow for significant flexibility: private sector NPS subscribers can now withdraw up to 80% of their corpus at retirement, with the remaining amount used to buy an annuity, under recent regulatory reforms.

Comparing EPF and NPS for private employees

Here’s how the two schemes pile up on key parameters using official scheme objectives and structures:

1. Nature of participation

EPF: Mandatory for most organised sector employees; the employer and employee must contribute.

NPS: Voluntary for private employees; contribution amount and frequency are chosen by the subscriber.

2. Investment and returns

EPF: Offers fixed, government-declared interest rates, and returns are predictable.

NPS: Market-linked returns with potential for higher long-term growth but also higher risk.

3. Flexibility and portability

EPF: Tied to employment; transfers needed when changing jobs.

NPS: Portable across jobs and locations without interruption.

EPF: Provides a retirement corpus, pension (EPS), and insurance (EDLI) managed by EPFO.

NPS: Offers a retirement corpus with both lump-sum withdrawal and pension via annuity. Recent rules allow up to 80% withdrawal for private sector subscribers.

5. Risk and return trade-off

EPF: Low risk with assured interest.

NPS: Moderate risk due to market exposure, but potentially higher return over decades.

Which is better for private employees?

There’s no single answer; official scheme structures show EPF is ideal for those seeking security and guaranteed returns with built-in pension and insurance benefits, while NPS suits individuals seeking flexibility, higher long-term growth, and portability in retirement planning.

Many financial planners recommend a combination of both continue with EPF (mandatory and safe) while also contributing to NPS to diversify retirement savings, take advantage of market-linked growth, and benefit from the flexible corpus withdrawal and annuity options that NPS provides. The choice completely depends on the investors. The rest of the difference is explained above; it might help you make a firm decision.

(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)