Mumbai-based Malvika Chavan, 27, who worked as a guest relations executive at a hotel, lost her job last April amid the coronavirus outbreak. A couple of months on, she still hadn’t found a job and was finding it hard to make ends meet, with her savings getting depleted. Considering that she had been unemployed for 60 days, Chavan was able to dip into her Employees’ Provident Fund (EPF) kitty for funds till she found another job.Also read | How EPF changes over the years impact your retirement funds
Like Chavan, several million corporate employees have EPF as a mandatory contribution and prefer it over other instruments. The EPF scheme remains the top choice for corporate professionals thanks to its easy exit options during emergencies.
For private sector employers where EPF is mandatory (companies employing 20 people or more), other options such as the National Pension System (NPS) are also being offered to staff to ensure that there are investment options available.
As part of the EPF scheme, employees are required to contribute 12 percent of their basic salary for PF every month with the employer matching this amount. Over and above this, employees are free to contribute an additional fixed amount each month as voluntary PF.
What is the HR view on EPF investments?
Moneycontrol spoke to companies across sectors such as retail, financial services and manufacturing. While most were reluctant to come on record citing the ‘silent period’ due to results and PF being a sensitive topic, the consensus was that the PF scheme has been a blessing in disguise, especially for employees planning a work break or for medical emergencies or to buy a house.
The head of human resources at a private bank told Moneycontrol that a switch option should be allowed between the EPF and NPS so that customers who want to cut down contributions in a particular month due to family emergencies can do so.
A switch option would also allow employees to decide which retirement scheme they would prefer depending on their investment appetite for debt and equity.
Praveen Menon, Chief People Officer, IndiaFirst Life Insurance, said that the preference of an employee cannot be clearly established because EPF is compulsory for an employee and NPS is absolutely voluntary.
“If we were to compare Voluntary Provident Fund (VPF), which is an option under EPF and NPS, then the ratio is approximately 60:40 in favour of VPF for us. This clearly indicates that employees prefer VPF more at our company,” he added.
Ideally, he said, investments should be spread out across asset classes.
“In case of any exigency in terms of job attrition, EPF allows withdrawal of money. However, NPS Tier 1 is blocked till your retirement age,” he added.
Under the NPS Tier 1 account, individuals can withdraw only up to 25 percent for higher education, marriage of a child, home purchase and critical illness. However, there is no lock-in for NPS Tier 2 accounts.
Here, Tier 1 is a default account for retirement savings under NPS. Only individuals who have a Tier 1 account can open a Tier 2 account. The latter is an additional account that is meant for investments for savings purposes and offers quick redemption when in need of cash.Also read: EPFO’s poor returns from equities: Blame it on the choice of ETFs
What about flexibility in retirement savings?
An area of concern in the EPF scheme is that it does not offer flexibility in investments. So, for employees willing to take the equity market risk to earn higher returns, this is a dampener.
Sonu Iyer, Tax Partner & National Leader-People Advisory Services, EY India, said that while NPS provides a choice to invest in equity (maximum 75 percent), corporate bonds, government securities or alternate assets (maximum 5 percent) depending on the risk appetite of the employee, no such choice is available under the EPF scheme to the employee.
Iyer added that NPS can be an additional retirement savings benefit plan to diversify an employee’s retirement portfolio. This is because once an employee is covered under the EPF, the employee cannot opt out unless under specified circumstances.
NPS can also help save additional taxes. This is because apart from its inclusion under the Rs 1.5 lakh limit under Section 80C, employees can get up to Rs 50,000 additional deduction annually for their NPS contribution.
Companies want to offer their employees flexibility. Hence despite EPF already being present, NPS is being presented as an added option so that the retirement corpus is sufficient in times of rising inflation.
Preeti Kaul, President – HR of edtech firm upGrad, said that EPF continues to be a preferred choice over NPS among employees due to the tax and withdrawal benefits it offers.
Since upGrad has a relatively younger workforce, Kaul said that retirement benefits and options are less of a priority versus quick returns on their savings.
“Today’s workforce is well informed and deliberate about their financial goals. It’s the time of personalisation keeping in mind the individual drivers and needs of our employees. Our attempt is always to offer as many instruments as we can and create flexibility for employees to pick and choose what they need at the particular life stage they are at,” she added.
A good mix of both?
An ideal situation would be for employees to have a healthy mix of NPS and EPF so that they have exposure to all investment instruments. HR officials told Moneycontrol that one guaranteed instrument and one flexible retirement option would be beneficial.
Sandeep Bhardwaj, CEO, Retail Broking, IIFL Securities, said that in terms of liquidity, EPF is relatively more liquid. In terms of asset allocation, NPS offers greater control over the portfolio structure since EPF is predominantly invested into debt.
“I think employees should maximise their tax savings by investing in both NPS for retirement and EPF for goals such as house purchase, marriage and education,” added Bhardwaj.
For central government employees (except the Armed Forces) who have been recruited after January 1, 2004, the NPS scheme is mandatory. However, one issue that private sector employees face is that they are required to make additional retirement investments over and above the mandatory PF deductions.
“Already 12 percent of their basic goes towards PF and now if an employee wants exposure to equity instruments to build their retirement corpus, then NPS is the best option. But many are reluctant because then their monthly (take-home) salary will get smaller. Opting out of PF should be a feature available for those earning Rs 35,000 and above,” he added.
Many would be keen to shift if they have the option to do so, said HR experts. Prashant Singh, Vice President and Business Head-Compliance and Payroll Outsourcing, TeamLease Services, said that under the EPF scheme, the fixed rate of contribution against basic wages and disallowing withdrawal of voluntary contributions could be some challenges.Also read | NPS versus EPF: Which is the better retirement investment?
“Given a choice, highly paid IT sector employees, and manager and above profiles in other firms, may prefer to shift to NPS,” he said. Singh said that this would be because of a preference for control over savings and earnings, and because they would have flexibility in making contributions.