Hurdles in moving from EPF to NPS

Two years back, the government decided to make the pension sector more flexible by allowing individuals to choose between the Employees’ Provident Fund (EPF) and the National Pension System (NPS). To bring that decision into effect, the Income-tax Act,1961, was amended to make withdrawals from recognised provident funds and superannuation funds tax-free, if the withdrawals were made to transfer the money to NPS. “The Finance Act, 2016, amended the Income-tax Act, 1961, to allow tax-free withdrawals from recognised provident funds (this includes the EPF) and superannuation funds for the purpose of transferring the money to NPS,” said Sonu Iyer, tax partner and people advisory services leader, EY India. 

And on 6 March, in order to further facilitate the transfer, the Pension Fund Regulatory and Development Authority (PFRDA) issued a circular laying out the procedure by which individuals could transfer their money, from a provident fund or superannuation fund, to the NPS. 

The circular, however, does not tell you that you cannot transfer the money from your EPF account to the NPS just yet. 

Your EPF account is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). And unless the Act is amended—which is still being deliberated upon—a transfer is not possible. Read on for more details on the circular. 

Broadly there are two types of recognised provident funds. “One is covered under the EPF Act and it includes the exempt establishments that run their own provident fund trusts and are modelled after the EPF. The second category does not come under the EPF Act and is guided by the income-tax Act. There are only a handful of these establishments, such as public sector banks and embassies,” said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd. EPF is common among salaried employees, most of whom are likely to be contributing to the EPF. Every month, 12% of their salary goes to the EPF and the employer pitches in with an equal amount. 

The EPF authority declares a rate of interest every year and the money lying in your EPF account compounds at that rate. 

While most of you may be contributing to the EPF, you should know that it is optional for those who earn above Rs15,000 a month. 

The ground reality, however, is that it is not easy to opt out of EPF. That’s because once you have an EPF account, the EPF Act mandates you to transfer your EPF money as you move jobs. Even for those who earn more than Rs15,000 in their first jobs, EPF is a default investment product with the employer. Most employees in India are covered under the EPF Act, which clearly lays down circumstances under which withdrawals are possible. Complete withdrawal from EPF is possible only under specific circumstances, such as: retirement, after attaining 55 years of age, permanent and total disability or permanent migration from India. 

“However, withdrawal is not possible when you move to a new employer who is also covered under the EPF Act. So, unless the EPF Act is amended to allow withdrawals for the purpose of transferring the money to NPS, a transfer of funds to NPS may not be possible,” said Iyer.  

The PFRDA official we spoke to, who did not want to be named, said the circular lays down the process and will be applicable even to EPF subscribers or subscribers of other provident funds covered under the EPF Act, who want to move to NPS as and when the EPF Act allows them to do so. “Individuals who have superannuation funds, or a provident fund not covered by the EPF Act, can get their money transferred if the trust deed allows the transfer,” said the PFRDA official. 

But according to Iyer, the transfer may not be that simple, since for transfer of funds, changes will need to be made in the governing rules and trust deeds of the superannuation funds, which in itself can be a long-drawn process. 

However, according to experts, many employers are keen to discontinue their superannuation funds and move the entire money to the NPS. “Superannuation is increasingly becoming unpopular for various reasons. First, it imposes administrative responsibilities on employers and now most employers don’t have superannuation funds; so people are forced to withdraw the money and pay tax and also annuitize the corpus,” said Gopal.

There may be doubts about whether you can transfer money from EPF to NPS, but the process to do so has been described in detail in the PFRDA circular. 

First, you need to have an NPS account—either an individual account or a corporate NPS account. You then need to approach your current employer and request for a transfer of your superannuation fund to the NPS.

We are referring to the money in a superannuation fund and not in your EPF account (which is not possible at the moment), however the process for both remains the same. 

The employer will then approach the superannuation trust for withdrawal. The trust will then write a cheque in favour of the PoP (point of presence such as banks are distributors) for NPS used by the employer. The PoP will then upload the money in the subscriber’s account as arrears.

Even if you have a superannuation fund with the previous employer, you can get the entire money transferred to the NPS if the fund allows for a transfer. 

To do so, “you can approach the ex-employer and request them for a transfer. A PoP is needed even in this case as the fund will write a cheque favouring the PoP who will then get the money uploaded in your account,” said the PFRDA official. 

Even if you had opened an NPS account online without a PoP, for the purpose of transfer of money, a PoP is needed. “Without it, you can’t transfer money. You can ask any of the PoPs to transfer the money for you,” said the PFRDA official.

Remember, this money is not to be treated as contribution for the current year, so no tax deduction can be availed and you will also have to make the necessary contribution to the NPS for the year. Also, if you want the employer’s contribution in NPS, then you will need to shift your personal NPS to the corporate NPS account. 

The circular may not help most people at the moment, but PFRDA has set the discussion in motion.