The EFPO decides the rate based on the surplus it generates through its investments
The Employee Provident Fund Organisation (EPFO) has proposed to hike the interest rate to 8.65% for FY 2018-19, as against 8.55% in the previous year, benefitting over six crore Employees’ Provident Fund (EPF) subscribers from this move. The proposal will now be approved by the finance ministry. The EFPO decides the rate based on the surplus it generates through its investments.
For salaried employees, especially those in the private sector, EPF is an avenue for retirement savings, since it is mandatory. The other option is the National Pension System (NPS) which is voluntary. Employees contribute 10-12% of their salary towards EPF.
The EPFO invests its corpus largely in government securities, which are sovereign in nature. But a part of the corpus is also invested in equities through Exchange Traded Funds.
The advantage of EPF over NPS is that the former offers guaranteed returns, while in case of NPS the returns fluctuate since they are market-linked. The EPF, along with the Public Provident Fund (PPF), enjoys tax exemption at the contribution stage, interest accrual stage as well as withdrawal stage.
Contributions made by employees to EPF are tax-free if withdrawn after five years of continuous service.
In the case of NPS, only 40% of the corpus at maturity is tax-free. Of the remaining corpus, a part has to be used to buy an annuity for the pension.
EPF allows premature withdrawal for certain specific purposes such as education or marriage of the subscriber or family members, buying a house or medical emergencies, etc.
“Being backed by the sovereign guarantee, EPF deposits are one of the safest among all investment avenues. EPF also offers higher liquidity than many retirement solutions, as its subscribers can withdraw the entire corpus on remaining unemployed for two months or more. While the EPF interest rate is compounded yearly, it is still higher than annualised yield offered by most banks and small savings schemes,’’ says Naveen Kukreja - CEO and co-founder, Paisabazaar.com.
Current rates on some other long-term investment products are - Public Provident Fund - 8% and 10-year bank FD-6.7-7%.
However, on the flip side, the smaller size of EPF contribution and the low margin over inflation rate would render EPF corpus insufficient to deal with post-retirement expenses. Hence, EPF subscribers should also consider additional investments to create their retirement corpus.
“The best way to do that is to invest in equity mutual funds,” Kukreja adds.
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