EPF: Are they Provident enough?
Here is everything you need to know….
As an individual working in the innards of the corporate sector, there are several things one should know about the Employees Provident Fund (EPF). A popular savings scheme managed under the patronage of EPFO, the fund works in a way where both employees and employers contribute 12% (Rate Subject to change) of their monthly salaries towards an EPF scheme. Employees can then choose to withdraw the lump-sum amount (inclusive of the interest earned) either on retirement or opt for a premature exit, subject to certain conditions. Just like other investment options out there, an EPF too has its own set of pros and cons. We’ve broken down some of the most important things to keep in mind before investing.
Am I eligible to invest in an EPF Scheme?
- Well, an EPF is open to employees of both the Public and the Private Sectors, which means all working employees can apply to become a member of EPF India.
- Additionally, any organisation that employs at least 20 individuals is deemed liable to extend the benefits of EPF.
- Although, there is no age impediment in the fund. But, if an employee has already reached the age of 58, they are not eligible to start a PF account.
Is there a lock-in period and how do I withdraw these funds if I require them earlier?
Looking at the current tax rules, any interest earned from EPF is taxable if you opt to withdraw within 5 years of opening your PF account. The table below gives a quick summary of when and under what circumstances you can withdraw money from your PF account.
How are EPFs taxed currently?
- The Income Tax Dept has recently issued some new guidelines with regards to EPF Taxation. Going forward, PF accounts will now be divided into taxable and non-taxable contribution accounts from April 1, 2022.
- EPF earlier under section 80-C of the Income-tax act was exempted from tax on withdrawal, however, contributions exceeding ₹2.50L / year will be taxed from April 1, 2022, and be a part of the taxable contribution account as mentioned above. An Important thing to note is that all contributions until March 31, 2021, will be treated as non-taxable contributions
- Another crucial thing to keep in mind is that any interest credited to the PF account of an employee will be tax-free only for contributions up to 2.5L every year. Any interest on an employee’s contribution over 2.5L shall be taxed in the hands of the employee as Interest income. (As per your income slab)
I am confused if I should Opt for an EPF scheme or invest this money into Public Markets?
Retirement planning has become a hot topic among people as young as 25 with people adopting practices like F.I.R.E (Financial Independence, Retire Early) and many more. Investors are getting aware and want to Diversify their portfolios while making plans to financially secure life after retirement. With so many investment options coming up, it is becoming more difficult to zero in on the most suitable retirement option from a risk-reward perspective. Here’s a quick comparison between alternatives to EPFs.
Historically, EPF Returns have only gone down over the last 2 decades. During this tenure, public markets have given an average return of 11.7% (CAGR). With the new taxation rules being introduced, post taxation EPF returns are poised to go down which only ends up delivering inflation-adjusted returns in the range of 1 % to 2.15%. Mutual funds compared to this seem to be a better option from a long term perspective with better liquidity.
PF Returns over the last 20 Years
So should I invest in an EPF scheme or not?
- This answer depends on your investment objectives. Your EPF contribution adds fixed income exposure to your investment portfolio. On the other hand, debt mutual funds, although slightly higher on the risk-reward curve, have proved to deliver better inflation-adjusted returns over the long term than EPFs and FDs with a similar risk profile
- Suppose you already have a suitable % allocation to fixed-income investments to provide a cushion to your portfolio, in that case, any voluntary contribution that is currently going towards EPF can be considered towards long term Mutual funds, Equity or Debt, depending on your Risk appetite.
- Any retirement plan should ideally be a medley of several investments. Keeping the EPF as the debt portion of your retirement plan and investing 5–20% in stocks through a diversified fund, will make for an ideal asset class that can beat inflation and help you retire comfortably.
Disclaimer: Views expressed are for informational purposes only and do not constitute any Financial Advice whatsoever. Please consult a financial advisor and read offer documents carefully before investing.
