EPS vs NPS

When planning for retirement, it is crucial to understand the different savings schemes available to you. Two prominent retirement schemes in India are the Employee Pension Scheme (EPS) and the National Pension System (NPS). Each scheme offers unique features, benefits, and limitations, catering to various needs and preferences. In this article, we will discuss the details of EPS and NPS, comparing their structures, benefits, and suitability for different individuals to help you make an informed decision.

When choosing a retirement savings plan, understanding the key differences between the Employee Pension Scheme (EPS) and the National Pension System (NPS) is crucial. Below is a detailed comparison to help you make an informed decision.

1. Contribution

• EPS: The employer contributes 8.33% of the employee's salary (basic + DA) to EPS. The government adds an additional 1.16%. Employees do not directly contribute to EPS.
• NPS: Both the employee and the employer can contribute to NPS. The minimum annual contribution is ₹1,000, with no upper limit, providing flexibility in the amount contributed.

2. Returns

• EPS: Offers fixed returns based on a predefined formula. The pension amount is calculated as:
  
  Monthly pension= Pensionable Salary × Pensionable Service/ 70
  
  
• NPS: Provides market-linked returns that depend on the performance of the chosen investment options. Historically, returns have ranged from 8% to 10% per annum.

3. Pension Calculation

• EPS: Pension is based on the last 60 months' average salary and the total years of service.
• NPS: Pension depends on the corpus accumulated and the annuity purchased at retirement.

4. Withdrawal

• EPS: Pension benefits start from the age of 58. Early pension is available from the age of 50, but with a reduction. The pension can be deferred until the age of 60 for a higher amount.
• NPS: Subscribers can withdraw up to 60% of the corpus as a lump sum at the age of 60, with the remaining 40% used to purchase an annuity. Partial withdrawals are allowed under specific conditions.

5. Tax Benefits

• EPS: The pension received is taxable as per the individual's income slab.
• NPS: Contributions are eligible for tax deductions under Sections 80C, 80CCD(1), and 80CCD(1B) of the Income Tax Act. The lump sum withdrawal at retirement is tax-free up to 60% of the corpus.

6. Flexibility

• EPS: Limited flexibility in contributions and withdrawals.
• NPS: High flexibility in contributions, investment choices, and partial withdrawals. Subscribers can choose their asset allocation or opt for an automated allocation based on age.

7. Survivor Benefits

• EPS: Provides survivor benefits, ensuring pension to the spouse and children in the event of the pensioner's death.
• NPS: The remaining corpus is paid to the nominee in case of the subscriber's death.

8. Portability

• EPS: Limited to employment in EPF-covered organizations.
• NPS: Fully portable across jobs and locations, making it suitable for individuals who frequently change jobs or move locations.

9. Risk and Return Profile

• EPS: Low-risk as it offers a fixed pension, making it suitable for risk-averse individuals.
• NPS: Higher risk as it is market-linked, but with the potential for higher returns, suitable for those with a higher risk appetite.

When comparing EPS and NPS, it must be noted that NPS has more relaxed eligibility criteria and is available to a wider section of Indian citizens.

The eligibility criteria to benefit from EPS (National Pension Scheme) are as follows:

• You must be a resident Indian citizen, a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI).
• You must be between the ages of 18 and 70 (NPS can be extended to the age of 75).

The eligibility criteria to benefit from EPS are as follows:

• Your salary + dearness allowance shall not exceed Rs. 15,000 (applicable to EPS accounts opened after 1st September, 2014).
• You must complete 10 years of service to receive a pension.
• You must be 58 years of age to start receiving the pension (you can receive a reduced pension at a lower rate from age 50 onwards).

Also read: NPS withdrawal

The choice between EPS and NPS depends on various factors, including your employment status, risk appetite, and retirement goals.

1. Employment status

• If you are employed in the organized sector and are a member of EPF, EPS is a mandatory and beneficial scheme providing a guaranteed pension.
• If you are self-employed, work in the unorganized sector, or are a government employee, NPS is a viable option for building a retirement corpus.

2. Risk appetite

• EPS offers fixed returns with minimal risk, making it suitable for risk-averse individuals.
• NPS, being market-linked, carries higher risk but also the potential for higher returns, making it suitable for those with a higher risk tolerance.

3. Retirement goals

• EPS provides a steady pension based on your salary and service, ensuring a predictable income post-retirement.
• NPS offers flexibility in contributions and investments, allowing for a customized retirement plan. The lump sum and annuity options provide a balance between immediate and long-term income.

4. Tax planning

• If tax savings are a priority, NPS offers more significant tax benefits on contributions and withdrawals compared to EPS.

5. Flexibility and portability

• NPS is more flexible and portable, making it suitable for individuals who frequently change jobs or move locations.

Both EPS and NPS are essential components of India's retirement planning landscape, each catering to different needs and preferences. EPS provides a guaranteed pension for employees in the organized sector, offering stability and predictability. NPS, with its market-linked returns and flexibility, is an excellent option for individuals seeking higher returns and customization in their retirement planning.

Also read below articles related to EPS and NPS

• EPF vs EPS
• NPS Interest Rate
• NPS Withdrawal
• NPS Returns
• NPS Customer Care Number
• NPS Tier 2
• NPS Tier 1
• NPS Tier 1 vs Tier 2