He said employees who are no more covered under EPF due to various reasons such as leaving a job or shifting to an organisation where EPF is not applicable, can request for transfer of the accumulated provident fund to NPS, as the income tax Act provides tax exemption on one-time transfer of the accumulated provident fund to NPS.
However, the government is taking important steps to aid the movement to NPS. The Finance Act, 2016, amended the Income Tax Act, 1961, so that withdrawal from a recognised provident fund and a superannuation fund to transfer to NPS would not attract any tax. The next step was taken in March when PFRDA came out with a circular laying out the road map for individuals to transfer their money from a provident fund or superannuation fund to NPS. But, the ground reality is that those enrolled in EPF still can't shift to NPS.
The primary reason is that the EPF is governed by an Act of Parliament — the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. According to sources, there is currently a proposal within the government to allow movement in the reverse direction as well. It has been suggested that if a person is not happy with NPS, she should also be given a one-time option to migrate to the EPF. The good news is that employees whose retirement kitty is in superannuation funds, which don't fall under the ambit of the EPF Act, can transfer their corpus to NPS.
Once you have the option, should you shift from EPF to NPS? A person should take into consideration the following factors before making this decision: Risk, return, liquidity, and finally, tax provisions. "If somebody wants assured and stable returns, EPF is a good option. But if he is ready to take more risk to improve returns, he may move to NPS," says Manoj Nagpal, chief executive officer, Outlook Asia Capital.
EPF also offers better liquidity than NPS. After five years of service, if you stop working and there is a gap of two months, you can withdraw the entire corpus. Even while working, you can withdraw up to 90 per cent of the balance (or corpus) for situations such as constructing a house or a child’s marriage. NPS also provides liquidity in similar circumstances, but here you can withdraw only up to 25 per cent of the contribution (not the corpus).
Only after you have given thought to the above-mentioned factors should you consider the tax provisions. EPF enjoys exempt-exempt-exempt status while for NPS, the corpus is taxed at withdrawal. In actual terms, the tax impact is limited. “Over a span of 20-30 years, if the NPS gives even marginally superior returns over EPF, the tax impact will get nullified,” says Nagpal.