Brief History

At the Union Budget of 2015-16, Government had put out a proposal for members of the Employee’s Provident Fund (EPF) to move their retirement savings to National Pension Scheme (NPS). While, NPS is becoming a more popular way of saving money for retirement, it was thought that if there could be an easy access to transfer amounts from provident funds too. The amount so transferred will not be treated as income for the current year and hence it will be tax free. However, for this to take place, a member must have a NPS Tier 1 account. It can also be opened online via eNPS on the NPS Trust website or the employer of the member can do it incase they have implemented it in their organisation.

Transfer of Funds

Transfer request needs to be made by approaching the concerned Provident Fund (PF) office, through the current employer of the member. Then PF Trust will have to initiate transfer of the fund as per the provision of Trust Deed read with provisions of the Income Tax Act, 1961.

In case of government employee, a request to the PF Fund to issue a letter to the present employer mentioning that the amount is being transferred from the fund to be credited to member’s NPS Tier-1 account.The present employer or point of presence (POP), i.e. the nodal office, while uploading the fund will mention on the transfer from PF Fund in the remarks column while uploading. The upload has to be made as per request letter of the ex-employer.

In case of private sector employees, including subscribers covered under All Citizen’s Model NPS, the employees should request the recognised PF Fund to issue a letter to the present employer/ PoP as the case may be, mentioning that amount is being transferred from the PF Fund to be credited in the NPS account of the employee/ individual Tier-I account.The POP will get the amount collected and the same has to be uploaded in the NPS account of the subscriber.

Should you switch?

• Equity exposure, like seriously?

  One of the reasons why NPS is considered to be a superior product than EPF is because of it’s exposure to equity. It is enough to give goosebumps to a lot of people. Although, maximum allocation to equity in NPS has been restricted to 50% while EPF is fully a fixed income based product.

  But then considering your retirement is several years away, not like immediate 5-7 years, then a mere exposure of 50% to equity in NPS doesn’t make a good reason. It is more beneficial to have EPF going and park the rest of capital into an equity based mutual fund. Chances of better performance and more exposure of equity are higher than NPS.

• Taxation : The Ultimate Saga

  The word ‘Tax’ in India is enough for any person to mindlessly invest in anything just so that some money can be saved. It’s the oracle word for making any kind of investments. As if, we are more concerned with saving tax rather than making money.

  Consider this, any EPF withdrawal after 5 years of continuous service is tax free. However, NPS has some other rules. Only 40% is tax free, while the balance is subject to tax based on the tax slab of the individual. And yes, that 40% is parked in annuity which is not redeemable. So there are no free lunches in this country with regards to taxation.

• Liquidity, the exposure to money

  EPF can be withdrawn completely upon maturity. Now an individual may argue, ‘so what?’
  But, with regards to NPS, only 60% of the money is eligible for withdrawal upon maturity. While the rest 40% is parked in Annuity, plus the rate of return on annuity will be based upon the rates prevailing at that period of time. Yes, it may go up or it may go down! Now that’s far into the future with very little certainty.

  Individuals because of their fear of taxation, always forget that the ultimate aim of saving or investing money is to use it at a certain point in time. It’s a form of myopia which a lot of people go through. At the end of the day, everyone enjoys if they catch 2 birds with one shot. But does that really work?

  Getting an exposure to equity in NPS will restrict the individual to only 60% of his corpus upon maturity while a fixed income based EPF will be available for withdrawal completely. The shot just got a little tough.

• Hope – NPS will become tax free!

  We forget so easily, it was just last year, central government wanted to tax EPF! So it will be a little unwise to hope for a miracle in NPS. Tax is the revenue for Government on which they are able to run the country, if they start giving free lunch to everyone then it will become difficult for them to exist.

  So to keep such high hopes of NPS being tax free in the future will lead to disappointment.

Even if the offer of NPS looks lip smacking delicious, there are these tiny devils in details. It will not be a great option to switch the existing EPF account to NPS account. Rather, if an individual can gradually increase his overall exposure to equity through the help of his advisor, then NPS would automatically become meaningless. While saying this, there is no intention of portraying NPS as a bad product but if the retirement of an individual is several years away then it will make more sense to participate in the growth story of India by investing in direct equity or equity based mutual funds. At the end, an individual could also brag like, ‘Yes, I paid a little more tax but in return got more benefit because India progressed.’

Jinay Savla