NPS vs. EPF: Which is More Beneficial for Tax and Returns Perspective After Budget 2025?

Table of Contents

1. Introduction
2. Overview of NPS and EPF
   • National Pension System (NPS)
   • Employees’ Provident Fund (EPF)
3. Impact of Budget 2025 on Tax Benefits
4. NPS vs. EPF: Which Should New Employees Choose?
   • Why Choose NPS?
   • Why Choose EPF?
   • Recommended Strategy for New Employees
5. Returns Perspective: NPS vs. EPF
6. Conclusion

Introduction

With Budget 2025 introducing significant tax changes, salaried employees must rethink their retirement savings strategy. While National Pension System (NPS) and Employees’ Provident Fund (EPF) have long been the two primary tax-efficient retirement investment options, the new tax regime eliminates Section 80C deductions, affecting EPF but keeping employer contributions to NPS (Section 80CCD(2)) tax-free.

This article provides a detailed comparison of NPS and EPF, analyzing tax efficiency, returns, liquidity, risk, and post-retirement tax impact with an elaborated numerical example.

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1. Overview of NPS and EPF

National Pension System (NPS)

NPS is a market-linked pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA), designed to provide post-retirement financial security.

Key Features:

• Open to individuals aged 18 to 70 years.
• Two types of accounts:
  • Tier I (mandatory for tax benefits, has withdrawal restrictions).
  • Tier II (voluntary, no tax benefits).
• Investments are diversified across equity, corporate bonds, and government securities.
• Employer Contribution: Up to 10% of salary is tax-free.

Employees’ Provident Fund (EPF)

EPF is a government-mandated retirement savings scheme managed by the Employees’ Provident Fund Organisation (EPFO), offering risk-free, fixed returns.

Key Features:

• Available for salaried employees in organizations covered under EPFO.
• Employer contributes 12% of basic salary + DA, which is exempt from tax.
• Employee contributes 12%, which is taxable in the new tax regime.
• Interest rate: Fixed by the government annually (8.15% for FY 2024-25).
• Withdrawal allowed after 58 years or upon leaving employment after 10 years.

Insight:

• Employees who are already contributing to EPF must continue as per PF rules.
• New employees joining the workforce now have the choice to opt for NPS over EPF, which can offer greater flexibility, higher returns, and continued tax benefits on employer contributions.
• NPS is preferable for new employees in the new regime as employee EPF contributions (12%) are now taxable, whereas employer NPS contributions (10%) remain tax-free.

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2. Impact of Budget 2025 on Tax Benefits

Tax Treatment in the Old vs. New Regime

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3. NPS vs. EPF: Which Should New Employees Choose?

Why Choose NPS?

• Higher Returns: NPS provides market-linked returns (8-12%), which are higher than the fixed EPF returns (8.15%).
• Tax Efficiency: Employer NPS contributions (10% of salary) remain tax-free under both regimes.
• Greater Flexibility: Investors can choose equity exposure and customize their investment mix.

Why Choose EPF?

• Stable Returns: EPF offers a fixed, government-guaranteed return.
• Safe Investment: No market volatility compared to NPS.
• Complete Tax-Free Maturity: EPF withdrawals remain completely tax-free upon retirement.

Recommended Strategy for New Employees

• If you prefer risk-free, stable returns → Choose EPF.
• If you want higher long-term growth and tax benefits on employer contributions → Choose NPS.
• A hybrid approach could be beneficial: Employees can contribute the mandatory 12% to EPF while also opting for NPS via voluntary contributions to maximize returns.

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4. Returns Perspective: NPS vs. EPF

5. Conclusion

With Budget 2025 reducing the tax rates under the new tax regime,for employees choosing new regime EPF employee contributions are now taxable . However, employer contributions (EPF 12% and NPS 10%) remain tax-free, making them critical for retirement planning.

 Final Verdict:

• New employees opting for the new tax regime should prioritize employer NPS contributions over EPF employee contributions for tax efficiency.
• Existing employees must continue with EPF contributions as per PF rules.
• For long-term financial security, a mix of EPF (tax-free growth) and NPS (higher returns) can provide balanced benefits.

Check out our comprehensive article on New Regime vs. Old Regime to make an informed choice for the FY 2025-26.