On rejoining, the subscriber will not be eligible for benefits accumulated in his previous tenure
Budget 2016 had provided one-time portability option for the salaried to move from the Employees’ Provident Fund (EPF) to the National Pension Scheme (NPS). This movement is tax free. Under the provision, if a person has been contributing to EPF, then he has the option of transferring his corpus to NPS.
The better option
Deciding whether to stay put in EPF or transfer to NPS is not an easy choice. NPS gives you more choices. You can choose the investment option (auto or active), asset allocation, and fund manager. With EPF you don’t have any say in where and how your money is invested. But EPF’s rate of return is attractive at 8.65 per cent last year. In NPS, the returns are linked to the performance of the funds.
In NPS tracking your investments is easier. Returns of NPS funds are published regularly. EPF’s rate of return for the current financial year is known in November-December, or sometimes even later (as was the case this year). Till then you are not aware how much return your corpus will earn.
Exiting EPF and opting for NPS would also mean that the individual exits from Employees Deposit Linked Insurance as well as the Employees’ Pension Scheme (EPS), which means losing out on the benefits of insurance and pension.
But once he shifts to NPS, the employee will have a one-time chance to return to the EPF fold. However, on re-joining EPF, the subscriber will be treated as a new entrant and will not be eligible for the benefits he might have accumulated in his previous tenure in the EPF, like count of number of years already served for the purpose of the exemption.
If an employee terminates employment and does not take up another employment within two months with an employer who is registered under EPF, the entire fund balance in EPF can be withdrawn in lump sum. This enables the employee to have easier liquidity in EPF funds. He can also get up to 90 per cent as advance in some situations: for medical treatment, housing, child’s education and marriage. On the other hand, an employee who has attained 60 years of age can only withdraw 60 per cent of the funds parked in the NPS account as lump sum. The rest has to be annuitised, which gives monthly pension pay outs. Further, partial withdrawal from NPS up to 25 per cent of own contribution only is allowed after 10 years.
Currently NPS is under exempt exempt tax (EET) structure wherein withdrawal from NPS on maturity is tax free up to 40 per cent of the corpus. On the contrary, EPF is under exempt exempt exempt (EEE) tax structure. Here, EEE refers to deduction at the time of investment, exemption from taxation of return on investment, and exemption of gains at the time of maturity of fund. EET means that income is taxable at the time of withdrawal.
For employees, EPF has been the most favoured retirement savings scheme. NPS is less popular at present among employees due to less flexibility and partial taxability at the time of withdrawal.
How to transfer
The Pension Fund Regulatory and Development Authority (PFRDA) has issued a circular outlining the process to enable portability. The subscriber should have an active NPS tier 1 account which can be opened either through the employer by filling up the prescribed subscriber registration form, through a point of presence or PoP (these include banks and other registered institutions), or online through eNPS on the NPS trust website.
The first step is to approach the recognised provident fund (PF) trust through the employer and file a request for transfer of funds to NPS account. The recognised PF trust will have to initiate the transfer of the funds as per the provision of the Trust Deed/Income Tax Act.
The employer should request the PF to issue a letter to the present employer/POP mentioning the amount being transferred from the fund, which is to be credited to the NPS Tier-1 account of the employee. In case of a private sector employee, the following have to be provided: cheque or draft made in the name of the POP, collection account—NPS Trust, subscriber name, and Permanent Retirement Account Number (PRAN).
In EPF, if you withdraw your corpus before completing five years of continuous service, then the proceeds are taxable. With the introduction of the new provision, transfer of funds of an employee from his existing EPF to NPS is not liable to be treated as income of such employee for that said year, and accordingly, not taxable.
If an individual deposits money in his account under NPS, he is eligible to claim deduction under Section 80CCD. However, if such a deposit is on account of transfer from the EPF account to the NPS account, then it will not be eligible for a deduction.
Taking the plunge
- EPF’s rate of return is attractive
- EPF offers more flexibility in case of premature withdrawal
- NPS offers more choices
- Tracking performance is easier in NPS
- NPS tax treatment at withdrawal is less favourable
Mistry is partner, Nagarsenkar is director and Bansal is deputy manager at Deloitte Haskins & Sells