In the Budget 2015, the initiative to transfer the balance of the Employees Provident Fund (EPF) to the National Pension System (NPS) tier-1 account was permitted for employees to select either NPS or EPF. The Pension Fund Regulatory and Development Authority (PFRDA) permits subscribers, under some provisions, to transfer funds from an approved EPF account to an NPS account. It must be remembered that the transfer to NPS of the EPF balance is entirely tax-free, considering that the employee has worked for five years or longer on a continuing basis. TDS will be applicable if an EPFO subscriber withdraws more than Rs 50,000 of amount from EPF account before five years of continuous service. To fit the requirements of various types of investors, NPS provides a variety of funds (Ultra-safe, Conservative, Balanced and Aggressive). The fund type can be selected by an investor as per his/her risk appetite.
Procedure to transfer EPF balance to NPS online
- First, you will have to open an NPS Tier-1 account via Points-of-Presence (PoP), or online through eNPS portal. (Note: Points-of-Presence relates to banks or other institutions that have been identified with PFRDA as PoP).
- To initiate the transfer, an application must be submitted through the existing employer of the individual to the recognised employee provident fund or superannuation fund to transfer the balances in the EPF or superannuation fund account to his or her NPS account.
- After receiving the transfer request, the EPFO will trigger the transfer of balances into the EPF account. A cheque or draft will be issued by the retirement entity on behalf of the NPS Nodal Office (if you are a government employee) or on behalf of the PoP collection account (If you are a private employee).
- A report to the employer specifying the amount being transferred to the employee's NPS tier 1 account will be released by the Nodal EPFO Office. Once the fund is deposited, the NPS account will be updated and you will get the confirmation alert for the same on your mobile number registered with NPS.
- The Employees' Provident Fund invests your investments in government securities, bonds, debt securities, etc., and the EPF has boosted the annual interest rates on the transfer of the fund balance from 8.75% to 8.80% over the last three years. NPS does not, however, give subscribers any fixed return. The NPS Trust's FY16 Annual Report reveals that the return provided under its different schemes has varied from 7.86 percent to 14.30 percent since its establishment.
- NPS investments are deemed to offer higher returns as opposed to EPF. Over the last 10 years, the total return of NPS funds has been about 10 percent if you contribute 50 percent of your NPS investment contribution and 50 percent to government securities. EPF, on the other extreme, generates 8.5 percent interest for its members respectively.
- And apart from better yields, while investing in an NPS scheme, the NPS investor receives an additional tax benefit of Rs 50,000 in terms of tax exemption under section 80CCD (1B). Under Section 80C of the Income Tax Act, this exemption is in addition to the Rs 1.5 lakh as a tax benefit.
Key points to consider while making withdrawals from EPF
As an employee, the entire fund balance in EPF can be withdrawn in lump-sum if you quit the employment and do not join any other employment with an employer who is enrolled under EPF for two months. This is a positive step from the point of view of an employee since it supports the employee who can use these funds to fulfil his or her long-term financial goals. However, under NPS, an individual who has 60 years of age or above can withdraw a lump-sum limit of 60 percent of the fund balance and the remaining fund goes to the monthly pension annuity account.
- Your EPF balance will be taxable if you choose to withdraw funds from EPF before completing 5 years of employment.
- If you withdraw more than Rs. 50,000, TDS will be applied on EPF. The cap was Rs. 30,000 prior to October 2016.
Withdrawal from the EPF is absolutely tax-free, considering that the employee has worked five or more years on an ongoing basis, whereas withdrawal from the NPS is tax-free only up to 60% of the gross amount (40 percent until FY 2018-19).
However, though the transfer procedure has been explained by the PFRDA, it is not yet effective for all. The EPF defines certain conditions where if you take retirement after reaching 55 years of age, If you are migrating from India, or if you are temporarily or fully disabled, EPF withdrawal is possible. Once you opened NPS Tier-1 account and transferred your funds from EPF to NPS account implies that you have exited from Employees Deposit Linked Insurance and Employees' Pension Scheme (EPF). Transferring funds from EPF to NPS can be a smart option because it is important to have sufficient equity exposure in order to cherish good returns for long-term goals considering the rate of inflation.