BASICS: It is a social security scheme for salaried individuals (other than government employees) requiring both employer and employee to make a monthly contribution of 12% of salary (basic wages, DA & retaining allowance). An employee can also make a contribution in excess of 12% into a Voluntary Provident Fund (VPF).
INVESTMENT: Mandatory if monthly salary is less than 15,000. Other employees can opt for the same.
LIQUIDITY: Accumulated sum can be withdrawn on retirement or resignation (after remaining unemployed for
two months). Partial withdrawal is allowed under certain circumstances like medical exigency, marriage, etc.
RETURNS: Risk free. For 2021-22, EPFO has declared interest rate at 8.1%.
TAX BENEFITS: Allowed as deduction within the overall limit of 1.5 lakh under Section 80C. Employer’s contribution up to 12% of salary is not taxable in the employee’s hands. However, employer’s contributions to EPF (in excess of 7.5 lakh in a financial year) and income accruing on the same is taxable. If interest accrued on employee’s contribution exceeds 2.5 lakh per annum, it is also taxable. This has made investing additional sums in VPF a less attractive option.
TAX ON WITHDRAWAL: Taxable only if the amount is withdrawn before completing five years of continuous
National Pension System (NPS)
BASICS: Voluntary retirement savings scheme available for both salaried and non-salaried individuals. Mandatory for govt employees.
INVESTMENT: Minimum contribution is 1,000 for Tier-I account and 250 for Tier-II account. No upper limit for
contributions. Tier I is a long-term investment account, where the sum cannot be withdrawn until retirement. Tax benefits are also different. NPS offers subscribers various investment options (equity funds, debt funds, gilt funds,
alternative investment funds). They have freedom to switch options/pension fund managers.
LIQUIDITY: Locked till superannuation or 60 years of age. However, partial withdrawal for specified reasons possible after three years and subject to a maximum of 25% of contributions made. Withdrawal permitted three times.
RETURNS: Returns are not guaranteed and are subject to market risks. For example, an investment in Tier I NPS Account in LIC Pension Fund Ltd., under Scheme E has generated return of 10.45% over 5 years whereas investment in the same fund under another scheme (Scheme C) has generated 7.67% over 5 years (based on data as on Jan 6, 2023).
TAX BENEFITS: Subscriber to a Tier 1 account can claim tax benefits within the overall ceiling of 1.5 lakh under Section 80C (however, government employees can claim this benefit even if they have invested in a Tier II account).
An additional deduction for investment up to 50,000 in NPS (Tier I account) is available under Section 80CCD (1B). If employer contributes up to 10% of salary (Basic+DA), this sum is available as a deduction under Section 80 CCD
(2). For government employees this cap is 14%. However, employer’s contributions in excess of 7.5 lakh in a financial year and income accruing on the same are taxable.
TAX ON WITHDRAWAL: Lumpsum withdrawal (on superannuation) of 60% of accumulated balance is
exempt from tax. Monthly annuity is subject to tax.
Public Provident Fund (PPF)
BASICS: It is a voluntary tax savings plan available for both salaried and non-salaried individuals where lumpsum payout is available after a specified lock-in period.
INVESTMENT: A minimum of 500 per annum with a maximum cap of 1.5 lakh is permitted. Investments can be in lump sum or in instalments.
LIQUIDITY: Balance can be fully withdrawn only upon maturity i.e. after 15 years. Partial withdrawal, based on a prescribed formula, is permitted after six years. Further withdrawal can be made only once in a financial year.
RETURNS: These are risk free. The current interest rate for Q4 (January to March) of the financial year 2022–23
has been set at 7.1%
TAX BENEFITS: Contribution to PPF is allowed as deduction within overall limit of 1.5 lakh under Section 80C.
TAX ON WITHDRAWAL: Withdrawals from PPF, either partial or in whole, are exempt from tax
Read More: EPF V/S PPF V/S NPS: Boost your retirement piggybank