NPS vs EPF: Everything You Need to Know About Retirement Savings

Planning for retirement is not something you leave for later. It is a financial responsibility that shapes how financially sound you live when you retire or your regular income stops due to unemployment. In India, two of the most trusted options are the Employees’ Provident Fund (EPF) and the National Pension Scheme (NPS), which help you build a financial cushion for your post-retirement years. Although they might sound like they serve the same purpose (building a corpus for post-retirement), they work very differently, offer different levels of flexibility and come with distinct tax benefits.

Table of Content

• What is NPS or National Pension Scheme?
• How to Calculate NPS?
• What is EPF or Employees’ Provident Fund?
• How to Calculate EPF?

While EPF is a mandatory savings scheme for individuals with fixed salaries, NPS is a voluntary, market-linked retirement option designed to help individuals grow their funds over the long term. Understanding the nuances of EPF vs NPS related to how each one functions and which one aligns better with your long-term goals is crucial. In the comparison post ahead, we break down the essentials of EPF vs NPS in a simple, practical way so you are better prepared on where your retirement money should go and how to plan for a stress-free retirement.

What is NPS or National Pension Scheme?

NPS is a voluntary pension scheme designed by the Government of India and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The scheme is open to salaried or self-employed individuals between 18 and 70 years of age. An individual may invest any amount of money periodically in NPS or whenever they want, as there is no fixed monthly requirement.

The investment one makes is allocated to equity, corporate bonds and government securities. If an individual wishes to withdraw NPS, they can withdraw 60% of the corpus as a tax-free lump sum, while the remaining 40% is utilised to purchase an annuity, which provides a stable monthly pension to the individual after retirement.

Because of its market-linked structure, NPS offers low to moderate risk with the potential for higher returns over the long term.

Suggested Read: How to Invest in NPS: Step-by-Step Guide for Beginners

How to Calculate NPS?

Since NPS is a market-linked investment, the calculation is slightly different from how EPF is calculated. To understand the calculation, consider the amount you contribute towards NPS monthly/annually, allocation to equity/ corporate bonds/ government schemes, fund performance and market conditions and lastly applicable charges like fund management fees.

There is no fixed return rate in NPS. However, historically, NPS has generated 8-12% returns, depending on the asset mix.

Documents Required for NPS

To open an NPS account (both Tier 1 and Tier II), the following documents are generally required:

• Aadhaar card or PAN card
• Proof of address
• Passport-size photograph
• Bank account details
• Completed NPS registration form (online or offline)

What is EPF or Employees’ Provident Fund?

EPF is a savings scheme made available to all salaried employees in India during retirement, regulated by the Employees’ Provident Fund Organisation (EPFO). As a standard practice, it is mandatory for all salaried employees working in organisations with twenty or more employees to contribute towards EPF. All salaried employees contribute a mandatory 12% of their basic salary + DA towards EPF. They contribute 12%, out of which 8.33% goes towards the pension component (EPS), while the remaining amount contributes to the EPF balance.

EPF offers an annual interest rate declared by the government, which is generally stable, offering predictable and low-risk returns. In case an individual wishes to withdraw from EPF, only partial withdrawals for specific life events, like marriage, home purchase, medical emergencies or higher education, are allowed. Full withdrawal of EPF is allowed only at retirement or after two months of unemployment.

For long-term financial security, EPF is considered a risk-free and government-backed investment option, ideal for conservative investors seeking guaranteed returns.

Suggested Read: NPS vs PPF: Which Investment Option is Better for Your Future?

How to Calculate EPF?

Understanding how to calculate EPF helps employees estimate their retirement savings accurately. Here is a simple breakdown of the EPF calculation for you:

• Employee contribution

12% of basic salary + dearness allowance

• Employer contribution

3.67% goes into EPF

8.33% goes into EPS (pension)

For example, if the basic + DA of an employee is INR 25,000, the employee contribution will be INR 3000 (12% of 25,000), and the employer contribution (EPF part) will be INR 917.50. So, each month, around INR 3,917.50 is contributed to the employee’s retirement savings (excluding EPS).

The annual interest declared by EPFO is added to the accumulated balance at the end of each year.

Documents Required for EPF

Employees do not have to apply for EPF individually; the employer handles the registration. However, the commonly required documents include:

• Aadhaar card
• PAN card
• Bank account details
• Proof of employment (handled by the employer)
• Passport-size photograph
• EPF declaration form (Form 11)

Ultimately, choosing between NPS and EPF depends on an individual’s retirement goals, risk appetite and financial planning style. Both offer valuable long-term security, but selecting the right mix is key to building a dependable post-retirement corpus. With decades of trusted experience in guiding investors through important financial decisions, Muthoot Finance offers expert support and a wide range of financial solutions to help you plan confidently for the future. Explore the offerings today to secure a stress-free and well-planned retirement with Muthoot Finance as your trusted advisor.