Strong protests against the Budget proposal to tax 60 per cent of the EPF corpus on withdrawal have led to the move being rolled back. But the game-plan to gradually make EPF increasingly unattractive relative to the New Pension System (NPS) to make investors migrate to the NPS is likely to continue.

Losing shine

The EPF is beginning to appear a bit jaded considering changes made in recent times. Earlier in 2014, the Employee Pension Scheme was withdrawn for new employees who joined the workforce after September 1, 2014 and whose basic pay plus dearness allowance exceeded Rs 15,000. For existing employees before this cut-off date, 8.33 per cent of the employer contribution (of the total of 12 per cent) goes to the Pension scheme, promising a regular though small pay out from this when he turns 58. Secondly, EPF withdrawal rules were also made more stringent last month, just before the Budget. Earlier, you could withdraw your EPF balance entirely when you left a salaried job and didn’t join another. Recent changes mandate that beginning with contributions from this year onwards, only the employee contribution and interest can be withdrawn entirely. The employer contribution will be locked–in till you turn 58. Whether this money would sit idle or would earn interest is a grey area. Third, Budget 2016 also proposed capping employer contribution to EPF at Rs 1.5 lakh ( for taking tax benefit), thus bringing down the savings potential through this route for the high income group.

Boost for NPS

These moves seem to be directed at promoting investments in the NPS (New Pension System) over the EPF. Unlike the EPF in which the government bears the burden of paying a fixed rate of return every year, the NPS is market-linked and returns are based on the performance of the funds. Even in Budget 2015, the Finance Minister spoke of bringing out a mechanism to help employees migrate from EPF to the corporate NPS scheme (which works somewhat on similar lines as the EPF), clearly bringing out the government’s preference to shift the burden from their shoulders.

That the NPS has been given a slew of concessions in the last one year supports this view. Budget 2015 announced an additional deduction of Rs 50,000 from taxable income for NPS investments over and above the Rs 1.5 lakh 80C limit. Besides, NPS was tweaked in mid-2015 by relaxing premature withdrawal rules. Earlier, if you withdrew before the age of 60, 80 per cent of the amount had to be used for purchasing an annuity. But the relaxation announced last year said that you could withdraw up to 25 per cent of your contribution (for specified expenses such as child’s education, illness, etc) if you have been with the NPS for at least 10 years. Finally, compared to the tax on the entire withdrawal from the NPS earlier, Budget 2016 has declared that 40 per cent of the withdrawal will be tax-free.

Though with the entire withdrawal now tax-free, EPF may seem more attractive on this front, remember that NPS can bring high returns if you choose to invest in equities ( up-to 50 per cent allocation allowed). Over a long time frame, it may be able to make up for the lack of tax-free status on the remaining 60 per cent withdrawal. You can no longer ignore the NPS as a retirement savings option.