At Wisemonk, we’ve guided numerous global employers in optimizing retirement benefits for their Indian teams by strategically combining the National Pension System (NPS) and Employees’ Provident Fund (EPF). These schemes, while distinct, work synergistically to build a robust retirement corpus while maximizing tax efficiency. Below, we break down their complementary roles, tax advantages, and compliance strategies for 2025.
1. NPS and EPF: A Complementary Retirement Strategy
A. Understanding EPF
- Purpose: A mandatory, government-backed savings scheme for salaried employees.
- Contributions: 12% of basic salary + DA from both employer and employee.
- Returns: Fixed interest rate (7.1% in 2025) with tax-free withdrawals after 5+ years of service.
B. Understanding NPS
- Purpose: A voluntary, market-linked retirement scheme open to all Indian citizens.
- Contributions: Flexible investments in equity (up to 75%) and debt instruments.
- Returns: Market-driven, with historical returns of 9–12% annually.
- Withdrawals: 60% tax-free at retirement; 40% used to buy annuities for regular income.
Key Insight: EPF provides stability through guaranteed returns, while NPS offers growth potential via market exposure. Together, they balance risk and reward.
2. How NPS Complements EPF
A. Diversification of Retirement Corpus
Example: A 30-year-old employee earning ₹10 lakh/year invests ₹1.8 lakh annually in EPF (employer + employee contributions) and ₹50,000 in NPS. By retirement, EPF provides a stable base (₹2.5+ crore), while NPS adds growth-driven wealth (₹1.8+ crore).
B. Tax Benefits Optimization
- EPF: Deduction up to ₹1.5 lakh under Section 80C (old tax regime).
- NPS:
- Section 80CCD(1): Up to 10% of salary (Basic + DA) within ₹1.5 lakh limit.
- Section 80CCD(1B): Additional ₹50,000 deduction (exclusive to NPS).
- Section 80CCD(2): Employer contributions up to 10% of salary (tax-free).
Combined Tax Savings:
Note: Under the new tax regime (post-2023), EPF contributions are not deductible, but employer NPS contributions remain tax-free.
3. Tax Benefits of NPS vs. EPF (2025)
A. EPF Tax Benefits
- Contributions: Deductible under Section 80C (old regime).
- Withdrawals: Tax-free if employed for 5+ years.
- Interest: Tax-free if contributions are within ₹2.5 lakh/year (new regime).
B. NPS Tax Benefits
- Contributions:
- Employee: ₹1.5 lakh (80C) + ₹50,000 (80CCD(1B)).
- Employer: Up to 14% of salary (80CCD(2)).
- Withdrawals: 60% tax-free; 40% annuity (taxed as income).
- Annuity: Pension income taxed as per slab rates.
Case Study:
- Employee: ₹15 lakh annual salary (Basic + DA = ₹10 lakh).
- NPS Contributions:
- Employee: ₹50,000 (80CCD(1B)).
- Employer: ₹1.4 lakh (14% of ₹10 lakh).
- Tax Saved: ₹62,400 (₹1.4 lakh employer contribution @ 30% slab).
4. Compliance Challenges & Solutions
A. Regulatory Hurdles
- EPF: Mandatory for organizations with 20+ employees; penalties for late payments.
- NPS: Voluntary but requires meticulous record-keeping for tax claims.
B. New Tax Regime Impact
- EPF: Loses Section 80C benefit; only employer contributions remain tax-free.
- NPS: Retains employer contribution benefits under Section 80CCD(2), making it more attractive.
C. Annuity Management
- Challenge: Annuity rates fluctuate (currently 5–6% in India).
- Solution: Use NPS corpus to buy annuities from IRDAI-approved providers like LIC or HDFC Life.
5. How Wisemonk Simplifies NPS and EPF Management
We help global employers streamline retirement benefits through:
- Automated Contributions: Integrate NPS/EPF deductions with payroll systems.
- Tax Optimization: Advise on structuring contributions for maximum deductions under old/new regimes.
- Compliance Assurance: Handle EPFO/PFRDA filings and audits.
- Employee Education: Multilingual portals for tracking NPS portfolios and EPF balances.