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Still can’t switch from EPFO to NPS PDF Print E-mail
Saturday, 07 October 2017 00:00
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Thirty months after the FM said this would be possible, labour unions have ensured that this has not happened

 

When various pension schemes under the National Pension System (NPS) offer returns between 12% and 22% versus the 8.5% that the EPFO offers, you would think most would want to port out. Over 30 years, a Rs 100 yearly contribution yields a corpus of Rs 1,155 if the return is 8.5%, while a 12% return takes this up to Rs 2,996 and a 15% return takes that up to Rs 6,621. Yet, of the one crore NPS subscribers, just 6.3 lakh are corporate employees. Indeed, it is because equity returns are higher that, over the last few years, even EPFO is investing more in equity—it now invests up to 15% of its incremental corpus in equity through exchange-traded funds (ETFs). Under the ‘moderate life-cycle’ plan of the NPS, however, individuals can invest 50% of their entire corpus in equity while under the ‘aggressive life cycle’ plan, this can now go up to as high as 75%. Unlike the EPFO which offers no such choice, NPS allows subscribers to choose their fund manager as well as what kind of an asset portfolio they would like. And while the NPS has a higher tax liability than EPF at the time of retirement, with the pension regulator working on systematic withdrawal plans (SWP), the tax liability will get reduced. If the EPFO which charges 3.3% of the salary as a fee is exorbitant, the Employees State Insurance Corporation (ESIC) that offers medical cover is worse. It takes away 6.5% of the salary—this is mandatory for those earning below Rs 21,000 per month—but with a claims ratio of under 50%, it is obvious medical insurance would be more cost effective.

 
This is why, in his budget speech in February 2015, finance minister Arun Jaitley spoke of how the belief was that both “have hostages, rather than clients”. Jaitley spoke of the government’s plan to offer workers a choice to migrate, yet 30 months later, this is not possible. In March 2017, two years after Jaitley’s initial promise, the pension regulator came out with rules on how to move from funds like the EPFO to the NPS, and important clarifications were issued. So, the transfer from EPFO to NPS would not be considered as part of the income of the current year and would, rightly, not be taxed. But since the pension regulator has no power to regulate the EPFO, until the EPFO Act is amended, such a transfer is not possible. Under the EPFO Act, anyone with a salary of under Rs 15,000 per month is mandatorily covered by it; while companies are within their rights to offer higher paid employees the choice between NPS and EPFO, few do this for fear of running afoul of the EPFO inspectors. In the case of ESIC, similarly, a medical insurance alternative is not available. In order to put NPS on a level playing field with EPFO, the government also needs to work on fixing kinks in its post-retirement withdrawal—unlike the EPFO where 100% of the corpus can be withdrawn tax-free, just 40% of NPS’s retirement corpus can be withdrawn tax-free, another 40% has to be compulsorily annuitised (and returns here are lower) and taxes have to be paid on the balance 20%. The important point, though, is that if this is how tough it is to transfer your own money from one scheme to another, it’s difficult to say India has made much of a dent in reducing red tape.

 

 

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