Should you switch from EPF to NPS?

The healthy returns from the NPS come at a time when the interest rate of the Employees' Provident Fund is being hotly debated and the interest rate for the Public Provident Fund has been pruned to 8.1%. This raises an important question. Should you shift your retirement savings to the NPS?

The proposal to switch from EPF to NPS was announced in last year's Budget and this year's Budget extended a one-time tax exemption to such a shift. A legislation to amend the Employees' Provident Fund & Miscellaneous Provisions Act has already been framed and is lying with the Law Ministry. The amendment allows EPF subscribers to make a one-time switch to the NPS. Once he shifts to NPS, the employee will have a one-time chance to return to the EPF fold.

The amendment also seeks to ensure that employers don't force a particular scheme down the throats of employees. No employer shall force any em ployee to opt for any particular scheme as a condition of em ployment or service. It's a progressive legislation which offers a lot of flexibility to the subscriber

However, the tax treatment of the NPS may prove a hurdle. While the EPF corpus is completely tax-free, this year's Budget has proposed to make 40% of the NPS taxfree. Why would anybody want to shift his money from the fully tax-free EPF to the NPS where only 40% of the corpus will escape tax? For the proposal to be successful, there should be parity in the tax treatment. Financial advisers see another problem in the NPS. At least 40% of the maturity corpus has to be put in an annuity to earn a monthly pension. Annuity rates in India are very low compared to what other options can offer. The Senior Citizens' Saving Scheme, for instance, gives 8.6% returns compared to 6.75% offered by annuities that return the principal after death (see graphic). The PFRDA wants that the investor should be allowed to look beyond annuities. Investors should be allowed to choose between annuities, which cover longevity risk but offer low returns, and other instruments which offer higher returns but do not cover longevity risk

Investors will face that issue much later.Right now, they want to know the best NPS funds to invest in. In the following pages, we identify the best performing funds for various types of investors.