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Totally Wrong To Tax EPF And NPS Identically

Employee Provident Fund withdrawals are fully Tax-Free. National Pension System withdrawals are fully Taxable.

By taxing 60% of EPF withdrawals and exempting 40% of NPS withdrawals, our Finance Minister wanted to bring them both on par. But is this really correct?

I don't think so:

Agreed, the objective of both schemes is to build a corpus for our comfortable retirement.

But, that's where the similarity ends:

If we examine the details, operationally both the schemes are completely different.

Therefore, to paint them with the same "tax" brush is unfair, unjustified and uncalled for.

Let us examine some of the key differences between Employee Provident Fund (EPF) and National Pension System (NPS).

1. Mandatory vs Voluntary

EPF is a mandatory scheme (particularly for those with income less than Rs.15,000 per month). As such, employers have to necessarily deduct your EPF contribution from your salary every month, and deposit the same in your EPF Account.

Whereas, NPS is a voluntary scheme. If you feel it serves your purpose, you can join the scheme and start contributing for your retirement. If not, the market offers you many other investment options [such as fixed deposits, post office small savings schemes, bonds, debentures, mutual funds, gold, shares, property, insurance and more].

EPF and NPS are NOT twins; they SHOULD NOT have identical tax liability.

2. Limited vs Unlimited contribution

In EPF, there is a minimum and maximum limit stipulated for your investment. At the minimum, you have to contribute a (compulsory) 12% of your monthly Basic Pay plus Dearness Allowance. And, you can (voluntarily) go up to a maximum contribution of 100% of Basic + DA (known as VPF or Voluntary Provident Fund).

Whereas, in NPS only the minimum contribution is fixed. This is a nominal sum of Rs.6000 in a financial year. However, there is no maximum limit prescribed on your NPS investment.

3. Fixed vs Variable Amount

In EPF, your monthly contribution is "fixed". This, as mentioned above, is a minimum of 12% of your monthly basic pay plus dearness allowance; or more if you have opted for voluntary contribution, over and above the minimum amount.

Whereas, in NPS every month you can invest as much amount as you wish. Further, this can vary every month and every year.

For your Retirement Planning, EPF Handsomely Beats NPS.

4. Investment Universe

In EPF, the available corpus can be invested in Government Securities or GSecs only. (Of course, very recently the Employee Provident Fund Organisation or EPFO has permitted a small 5% exposure to equities).

Whereas, NPS offers you three fund options to choose from. These are
i.   100% in Government Securities
ii.  100% in Corporate Debt
iii. 50% in Debt and 50% in Equity

By the way, the Tax Benefit On NPS Is All Bogus And Sham.

5. Expected Returns

In EPF, it is the EPFO that decides on the interest rates each year, in consultation with the Ministry of Finance. Of course, as a basis to fix the rates, the surplus generated during the year is considered. So, one can say that it is a mix of administered and market-linked rates.

Whereas, in NPS the returns are completely linked to the performance of the underlying securities (whether debt or equity) and hence 100% market-linked.

In view of these significant differences between Employee Provident Fund and National Pension System, isn't it wrong to treat them as same; and make them pay the "same" tax on withdrawal?

Do you know about the Nine Serious Limitations In NPS.

The intention of the Finance Minister to have a pensioned society is indeed laudable. Due to financial illiteracy, the lump sum amount received on retirement is quite often foolishly spent away. Thereafter, people face endless years of financial misery.   

However, by restricting us to a specific product i.e. annuity, FM is leaving us to the mercy of annuity providers. Once they know that we have no choice, they are sure to exploit this. Such restrictions often lead to inefficiency, incompetence and insensitivity. The stark difference, between the pre-liberalization and post-liberalization period, is known to one and all. As it is, annuity is a terrible product.

Therefore, while thankfully the proposed change has since been withdrawn, Govt. would do well to keep the field open to competition. And, instead of playing as our financial Godfather, it would do well to spend its time and efforts on spreading financial awareness.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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