Home Investment Does interest rate increase make EPF an attractive investment option?

Does interest rate increase make EPF an attractive investment option?

by Stacey Santos

The Employees’ Provident Fund Organisation (EPFO) board has raised the interest rate on employee provident fund account to 8.65 percent for FY19. This will benefit six crore subscribers. The percentage of interest for the previous year was 8.55 percent. The table below captures the interest rates on offer for the past few years.

The interest rate on EPF by ten basis points further widens the gap between the price offered by EPF and that of the Public Provident Fund (PPF) that currently provides an 8 percent interest rate. Both these instruments are used primarily to save for retirement planning and long-term saving. A point to note is investments in both these avenues earn tax-free interest.

“The tax-free nature of returns on EPF makes it an attractive option for individuals looking to save for their retirement over the long term,” said Vishal Dhawan, Founder and Chief Financial Planner of Plan Ahead Wealth Advisors. Conservative investors looking to invest in fixed income options with a sovereign guarantee for the long term can also look at a voluntary contribution to EPF.

An employee contributes 12 percent of his basic salary and dearness allowance every month to EPF. The maximum contribution allowed is up to 100 percent of the basic salary and dearness allowance. In its monetary policy earlier this month, the Reserve Bank of India cut the repo rate by 25 basis points, indicating interest rates in the economy are on their way down. However, the EPFO choose to hike the interest rates by ten basis points. “This dichotomy won’t last for a long period,” Dhawan said. Individuals should take note of the same while contributing to EPF, he said.

The EPF interest rate is reviewed every year and applies to the accumulated corpus and contributions in that year.

Individuals nearing their superannuation/retirement age (with two to three years left to retirement) can also consider aggressively investing in EPF. Such individuals can opt for a voluntary contribution to EPF by writing to their employers to that effect. Such money can earn tax-free interest until they retire and help boost their retirement corpus. This will help them obtain more on investments than bank fixed deposits that offer interest rates of 7-8 percent for a similar tenure and are taxable at the marginal tax rate.

However, a word of caution here. “Taxfree rate of return on EPF is attractive. However, investors must take into account their risk profile, investment needs, ability to hold on to their investments, and their asset allocation while investing aggressively into EPF,” says Suresh Sadagopan, Founder of Mumbai based Ladder 7 Financial Advisories.

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