Can I Have Both EPF And NPS Accounts?

Both the Employees' Provident Fund (EPF) and the National Pension Scheme (NPS) are designed to provide financial security to individuals during their retirement. While EPF is a mandatory scheme for salaried employees in the organized sector, NPS is a voluntary, government-backed pension scheme. Many individuals wonder if they can contribute to both schemes simultaneously and whether it’s beneficial. The answer is yes, you can have both an EPF and NPS account at the same time. Here's how they complement each other and how you can manage both.

Can I Contribute to Both EPF and NPS?

Yes, it is possible to have both EPF and NPS accounts, and you can contribute to both these accounts simultaneously. Let’s look at how each scheme works and how they can complement each other:

1. Employees' Provident Fund (EPF):

Mandatory Contribution:

The EPF is a mandatory savings scheme for salaried employees working in companies with more than 20 employees. Both the employee and the employer contribute a fixed percentage (typically 12%) of the basic salary to the EPF account every month.

Interest:

EPF contributions earn a tax-free interest, which is currently around 8-8.5% per annum.

Withdrawal:

EPF can be withdrawn either during retirement or after a job change, subject to conditions.

Tax Benefits:

The contributions to EPF are eligible for Section 80C deductions under the Income Tax Act. The amount in the EPF account is also tax-free at maturity (subject to certain conditions).

2. National Pension Scheme (NPS):

Voluntary Contribution:

The NPS is a voluntary retirement savings scheme where both employees and employers (if applicable) can contribute. It is open to both government employees and private sector employees.

Contributions:

An individual can contribute a minimum of ₹1,000 per year to the NPS, with no upper limit. The contributions to NPS are invested in a mix of equities, corporate bonds, and government securities, depending on the subscriber’s choice.

Tax Benefits:

Contributions to NPS are eligible for additional tax benefits under Section 80CCD(1) up to ₹1.5 lakh, and there’s an additional tax benefit of ₹50,000 under Section 80CCD(1B).

Withdrawal and Pension:

The NPS corpus is partially withdrawn at retirement (up to 60%), while the remaining 40% must be used to purchase an annuity, which will provide a monthly pension.

How EPF and NPS Can Work Together:

Double Benefits for Retirement Savings:

Having both EPF and NPS allows you to take advantage of both schemes. While EPF offers tax-free returns and is more secure with a fixed interest rate, NPS offers higher returns due to its exposure to equities and bonds. This dual strategy ensures that you have a diversified retirement savings portfolio.

Tax Deductions:

By contributing to both EPF and NPS, you can maximize your tax savings:

• EPF contributions up to ₹1.5 lakh are covered under Section 80C.
• NPS contributions also provide additional tax benefits of up to ₹50,000 under Section 80CCD(1B), making it a great way to reduce your taxable income further.

Pension Flexibility:

EPF can provide a lump sum amount upon retirement or after changing jobs, while NPS ensures a monthly pension. The combination of these two sources of retirement income provides better financial security after retirement.

Employer Contributions to NPS:

Many companies also contribute to the NPS (especially for employees in the private sector). While EPF contributions are mandatory, employers can make voluntary contributions to NPS, boosting the employee’s pension corpus.

This makes NPS an attractive option for employees who are looking for additional retirement benefits over and above what EPF offers.

Key Differences Between EPF and NPS:

Return Rate and Risk:

EPF provides a fixed return rate (interest) on contributions, making it a more stable and less risky investment. It is also tax-free at maturity.

Investment Diversification:

NPS, on the other hand, allows a more diversified portfolio with exposure to equities, bonds, and government securities. This gives the potential for higher returns, but also carries market risks.

Withdrawal:

EPF allows lump sum withdrawals, whereas NPS mandates that at least 40% of the corpus must be used to purchase an annuity for a monthly pension.

Tax Benefits:

Both schemes offer tax advantages, but NPS offers additional deductions that EPF does not.

Example:

Scenario 1: EPF and NPS Contribution for an Employee:

Salary: ₹50,000 per month

EPF Contribution: 12% of ₹50,000 = ₹6,000 each (employee and employer contribution).

Total annual contribution to EPF: ₹6,000 x 12 = ₹72,000.

NPS Contribution: Suppose the employee contributes ₹5,000 per month to NPS.

Annual contribution to NPS: ₹5,000 x 12 = ₹60,000.

The employee can claim an additional ₹50,000 tax deduction under Section 80CCD(1B) over and above the EPF deduction.

Result: This employee is saving ₹72,000 in EPF and ₹60,000 in NPS annually, thus building a significant retirement corpus through both schemes while also maximizing tax savings.

Conclusion:

Yes, you can have both EPF and NPS accounts, and contributing to both simultaneously can significantly enhance your retirement savings. While EPF offers stability and tax-free returns, NPS offers flexibility, higher potential returns, and additional tax benefits. By contributing to both, you maximize the advantages of diversification, tax savings, and pension security. This combination provides a more comprehensive retirement plan and ensures financial stability after retirement.