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 board of the Employees’ Provident Fund Organisation (EPFO) has raised the interest rate on employee provident fund account to 8.65 per cent for FY19. This will benefit six crore subscribers. The percentage of interest for the previous year was at 8.55 per cent. 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 Public Provident Fund (PPF) that currently provides an 8 per cent 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 taxfree interest.

“The taxfree 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 option with a sovereign guarantee for the long term can also look at a voluntary contribution to EPF.

An employee contributes 12 per cent of his basic salary and dearness allowance every month to EPF. The maximum contribution allowed is up to 100 per cent 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 as well as 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 taxfree interest until they retire and help boost their retirement corpus. This will help them obtain more on investments compared to bank fixed deposits that offer interest rates of 7-8 per cent for a similar tenure and are taxable at the marginal rate of tax.
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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