Budget 2015: EPF or NPS, employees get more choice
In what can be a blow to the Employees’ Provident Fund, and a big push to the National Pension System, employees will now be able to choose between investing in either of two instruments
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New Delhi: One man’s meat is another man’s poison, they say. At the expense of a huge blow to the Employee’s Provident Fund (EPF), Budget 2015 has said that every employee will now be given a choice between the EPF and the National Pension System (NPS).
In simple words, if you are a salaried employee, you will now get a choice to invest either in NPS and the EPF; your employer will have to give you that option. At the moment, a majority of employers allow you to invest only in the EPF.
Both the NPS and the EPF are defined contribution schemes, where a certain percentage of your salary gets invested. They were intended to promote savings among Indian citizens. However, since EPF is available for the organized sector and it invests money only in government securities and pays an interest rate that’s predetermined, it was felt to have a pension scheme that would allow even the unorganized sector to invest for their retirement and also invest in equities.
The NPS was born in 2004 for all government and then later (2009) for non-government employees (including the unorganized sector) to encourage them to build savings for their retirement.
NPS is managed more transparently; fund managers bid to manage this corpus, investments are market-linked and their net asset values declared daily.
NPS subscribers (investors) also get a choice of different asset classes; government securities, fixed income (bonds) and equity.
However, giving you the choice of NPS and EPF is not going to be as easy as it sounds. The government will have to put in place a portability mechanism by way of which, if you choose to start contributing to NPS (going forward) as opposed to the earlier EPF, you would be allowed to move your money from EPF to NPS. It doesn’t make sense for your company to maintain your EPF as well NPS accounts.
“This is a huge development and again will need an amendment to the EPF Act, as the Act makes it mandatory for establishments with over 20 employees to have an EPF. This definitely gives choice to the employee but for an employer it would be better to maintain just one account. From an administrative view, it would make sense if there was complete portability between NPS and EPF. Cost-wise, NPS is much lower for an employer than EPF, where it has to pick up about 1.1% of the basic salary of the employee,” said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd, an investment and legal consulting firm.
For salaried individuals below a certain income, there is good news. Budget 2015 has announced that employees “below a certain threshold of monthly income” need not contribute to the EPF. For them, such contributions should be optional. However, Jaitley also added that even if the employee wishes to stop her contribution, the employer’s contribution must go on.
In the days ahead, the government would clarify what this threshold would be. “That means, you could instead save the amount in higher yielding options,” said Vidya Bala, head of mutual fund research, FundsIndia.com.
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