EPF vs NPS: Currently, the nation is in the midst of the Income Tax Return (ITR) filing season, with the deadline for filing returns for the financial year 2025-26 being July 31, 2026, and it is rapidly approaching. Consequently, every employed person is looking for ways to protect their investments and maximize tax savings. In India, the Employee Provident Fund (EPF) and the National Pension Scheme (NPS) are recognized as the most effective tools for long-term wealth building and tax savings. However, the tax benefits for these two schemes vary depending on whether you opt for the old tax regime or the new tax regime. The tax deduction regulations for these government schemes differ significantly between the two tax systems.
Tax Saving Formula in Old Tax Regime
– For taxpayers who stick to the old tax regime, combining EPF and NPS offers a great opportunity to save on taxes.
– Under the old tax regime, employee contributions to EPF are eligible for tax deductions under Section 80C of the Income Tax Act, allowing deductions for investments up to Rs 150,000 annually.
– Additionally, voluntary contributions to the NPS Tier 1 account qualify for an extra tax deduction of Rs 50,000 under Section 80CCD(1B).
– By combining EPF and NPS under the old tax regime, one can reduce their taxable income by up to Rs 200,000.
Changes in the new tax regime
The new tax regime, which has been made the default system by the government, offers lower tax rates but eliminates most personal exemptions. Under the new tax regime, the deductions under Section 80C and the additional deduction for self-contribution to NPS are eliminated, meaning there is no initial tax benefit for EPF contributions or self-invested NPS. However, there is an opportunity to save on taxes through the Corporate or Employer NPS Contribution.
Significant savings through employer contribution in the new regime
Despite the removal of personal deductions in the new tax regime, the benefits under Section 80CCD(2) for employer contributions to NPS remain intact. Employers can now contribute up to 14% of an employee’s basic salary and DA to the NPS, which is entirely tax-free. This can lead to substantial tax savings for employees. The government has imposed an upper limit to prevent high-income individuals from exploiting the system. The total contribution from an employer to an employee’s EPF, NPS, and superannuation fund in a year can be tax-free up to Rs 750,000. Any excess amount is considered part of the employee’s salary and taxed accordingly. Additionally, interest earned on EPF contributions exceeding Rs 250,000 in a year is fully taxable.
Recent changes to NPS rules
- – Under the new NPS rules, it is now possible to withdraw the 60% portion at retirement in installments through the Systematic Lump Sum Withdrawal (SLW) option until the age of 85.
- The limit for withdrawing 100% of the lump sum without purchasing an annuity has been increased from Rs 5 lakh to Rs 8 lakh.
- Individuals with an NPS corpus of Rs 8 lakh or less can withdraw the entire amount tax-free without needing to buy a pension plan.