Some of your earnings are set aside for your retirement in a pension fund, a plan for savings for retirement. A trustee oversees the funds, which are typically paid out in the form of a monthly pension when one retires. A provident fund is similar, but the entire fund is paid out in a lump sum rather than in the form of a monthly pension.
In this article, we will let you know the difference between EPF and EPS in detail.
What is a Pension Fund?
Both employee and employer contribute every month to make a pool of money for benefit after retirement of the employee. Most employers are responsible for managing the retirement savings accounts for their employees. However, there are some pension funds in India that may allow the members to make investment choices and level of contribution. All government employees are covered under the Tier 1 scheme, which contributes 10% of each employee’s monthly basic pay, dearness allowance, and earned dearness pay to his/her NPS account.
What is a Provident Fund?
In India, provident funds are government-sponsored retirement schemes. Most provident funds are supported by contributions from the employers and employees and are exempt from taxation. The rules of withdrawal of provident funds are determined by the Indian government, such as the upper limit of the lock-in, the minimum age for withdrawal, and the amount of withdrawal. The surviving dependents of the participant, such as their spouse, children, and other relatives, can withdraw this money if they die. The Indian government also provides a low-cost savings scheme known as the Public Provident Fund, or PPF, alongside the provident fund.
EPF vs EPS: Difference Between EPF and EPS
The difference between EPF and EPS schemes. Let’s have a look here.
| Feature | Pension Fund | Provident Fund |
| Primary Goal | To provide a consistent income stream after retirement through regular contributions during employment. | The salary of an employee is deducted every month to pool the amount for retirement. |
| Contribution Source | The fund is made up of the contributions of both the employee and the employer. | Primarily funded by employee contributions. |
| Investment Management | Managed professionally by fund managers with a focus on long-term growth potential. | Usually managed by the employee, with investment options often including fixed deposits and bonds. |
| Withdrawal Taxation | Withdrawals in retirement are generally treated as taxable income in the year they are received. | Withdrawals are tax-exempt up to a specified limit. |
| Payout Structure | An annuity option to maximize optimal cash flow after retirement. | Offers a lump sum amount at the retirement of an employee. |
| Employer Obligation | The employer may have to contribute more if the fund’s performance doesn’t meet predefined actuarial benchmarks. | The employer’s responsibility ends after making their stipulated contributions. |
| Vesting Period | Frequently includes a vesting period, requiring a minimum duration of employment to be eligible for benefits. | Generally does not have a vesting period, and benefits are usually accessible immediately. |
| Pre-Retirement Withdrawal | Typically restricted, with withdrawals allowed only under specific, often severe, circumstances | Allows withdrawals for particular purposes, such as purchasing a house or funding education. |
| Return Taxation | Returns generated by the fund are taxed according to the applicable income tax slab rates. | Returns earned on the fund are taxed based on the individual’s income tax rates. |
Pension and Provident Fund Features
The features of the provident fund and pension fund are listed, which will help you to make an informed decision.
| Feature | National Pension Scheme (NPS) | Public Provident Fund (PPF) |
| Who Can Invest? | Indian residents as well as NRIs can invest. | Only Indian citizens |
| Interest/Returns | Market-linked returns, typically ranging from 10% to 12% | Fixed interest rate (currently 8.60%) |
| Minimum Age | 18 years | No minimum age; minors can invest with a guardian |
| Annual Investment | Minimum: ₹6,000; Maximum: No Limit | Minimum: ₹500; Maximum: ₹1 Lakh |
| Tax Benefits | Contributions are eligible for tax deduction from total income | Interest earned is tax-free |
Which one is Better: EPF vs EPS
EPF vs EPS have their own set of advantages and disadvantages and are made for their specific purpose. The models of operation of both are different, but the aim to provide financial support after retirement is identical. EPF provides a lump sum amount in hand after retirement, whereas EPS gives continuous monthly installments, and hence the choice of which is better is best defined by the situation of the employee and what he has to do after retirement.
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Conclusion
These are the primary differences between a provident fund and a pension fund, and the most suitable option can be selected based on requirements and eligibility. However, it is recommended to read through any plan or policy thoroughly before starting to invest in it.
Furthermore, before investing in any new fund, it is always recommended for investors to go through their savings and future requirements. The investor must study a plan before investing their hard-earned cash, since provident funds as well as pension funds have their advantages and disadvantages.
FAQs
Is Provident Fund defined benefit or fully funded?
Ans. The Provident Fund is a defined-contribution plan where the employer and the employee contribute a fixed amount.
Is it possible to take pension funds from one job to another?
Ans. Depending on the country and the corporation, there are instances where pension funds can be transferred from one job to another.
Can Provident Funds be transferred from one employment to another?
Ans. Since provident funds are linked to an employee’s Universal Account Number (UAN), they can be transferred from one employment to another.
Is higher education possible with a pension fund?
Ans. Depending on the plan and country, higher education might not be paid for by pension funds.
Can the Provident Fund be utilized for higher studies?
Ans. Higher education cannot be supported by the Provident Fund.
