The Union labour ministry has started to work on a budget proposal to let employees choose between provident fund and the fledgling National Pension System (NPS), labour secretary Shankar Aggarwal said. The ministry will discuss legislative changes to this effect at a meeting with the central board of trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) on 31 March.

While the retirement fund EPF invests exclusively in safe but low-yielding government securities for a guaranteed return, NPS subscribers can choose to invest in government securities, equities or corporate debt. While EPF returns are tax-free, NPS is taxable.

However, permitting employees to choose between NPS and EPF would require an amendment to the EPF Act.

Amendments to the EPF Act have been pending for two years, but after the finance ministry’s recent NPS push, the labour ministry hopes the changes can be implemented in 2015-16 itself.

Details on NPS eligibility, monitoring and implementation will be finalized after the CBT meeting, said Aggarwal.

Investment experts are divided on NPS, with some favouring it due to possibly higher returns thanks to its equity option, while others say EPF is superior due to its tax-free status.

According to an EPFO official, the government wants to go ahead with the changes even though there was no unanimity on the issue at the last CBT meeting. The amendment will also help move the subscriber’s entire EPF corpus to NPS, he added. However, the official admitted that having two retirement funds may lead to more paperwork.

However, Aggarwal said that with significant technology adoption, the issue can be handled smoothly.

Another EPFO official said the organization may be charged with monitoring the NPS contributions of those EPF members who migrate. The labour ministry cannot wash it hands of social security issues, the official said, and added: “We may charge a fee for monitoring it."

However, the first EPFO official said if one client shifts from EPF to NPS, he will lose EPF benefits as well as the insurance that EPFO provides to its contributors. This is, of course, apart from the tax levied on withdrawing the NPS corpus.

The first official said it was unwise to give options to a population with low levels of financial literacy. “The outcome: it may fall to a marketing agenda in the long run," he said.

EPF rules mandate 12% of basic salary to be deducted for the provident fund, with a matching contribution from employers.

According to Rituparna Chakraborty, senior vice-president of staffing company Teamlease Services Pvt. Ltd, take-home salaries of those who shift to NPS may go up by up to 12%, as employers are not mandated to contribute to it.

“I am not saying NPS is better than EPF or vice versa. The question is, once you give options, workers will exercise their discretion. Earlier, employees used to think about securing their future; thus, retirement savings was a key. But now, workers are talking about securing the present and bettering returns," she said.

“If implemented, it will allow more people to come to the organized sector and indirectly boost the corpus of both EPF and NPS," Chakraborty said, adding that the current debate will also lead to better services by both the organizations to their subscribers.

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