Look to alternatives such as the national pension system to build your retirement kitten. Voluntary contributions to EPF may not be a smart move with the double whammy of interest rate cut and tax on employee contribution income above Rs 2.5 lakh
While the Employees Provident Fund Organization (EPFO) has proposed cutting the rate for 2021-22 on retirement savings to 8.1% from 8.5% in the previous fiscal year, the lowest since 1977-78, the rate is still higher than what an investor can earn from other fixed-income plans. The payout must be endorsed by the Treasury Department before it can be reported.
Of the small savings programs, the Public Provident Fund (PPF) gets 7.1%, Sukanya Samriddhi – a scheme aimed at girls – 7.6%, and the savings scheme for seniors 7.4%. The interest on SBI deposits for more than five years is 5.5% and for seniors 6.3%.
Many salaried employees enrolled with the EPF make contributions to the Voluntary Provisioning Fund (VPF) on top of statutory deductions to create a higher-insured-interest-tax-free retirement corpus. But with the cut in EPF rate and tax on employee contribution income above Rs 2.5 lakh, VPF may no longer be attractive. Individuals should look to alternatives such as the National Pension System (NPS) to diversify their retirement cat and achieve higher tax-free returns than EPF.
The EPF way
For most salaried employees, EPF is an ideal way to save for retirement, provided the subscriber does not withdraw the corpus with every job change. The incremental corpus is invested in debt and equity instruments (exchange traded fund) in a ratio of 85:15. A subscriber contributes 12% of the basic and survivor’s allowance and the employer also contributes a corresponding amount. Out of the 12% employer’s contribution, 8.33% of the ceiling amount of Rs 15,000 per month goes to the employee pension scheme, the pension pool. Investments in EPF get a tax break of Rs 1.5 lakh under section 80C, the interest earned is tax free.
VPF or NPS?
Many individuals make voluntary contributions in EPF apart from the mandatory 12% of the employee share. Contributions to VPF can be made up to 100% of base salary and redundancy pay. The interest rate of VPF is the same as that of the EPF and the returns are tax free. However, employee contribution income above Rs 2.5 lakh is taxable. The limit is Rs 5 lakh when employers do not pay contributions. Furthermore, employer contribution to EPF, General Provident Fund and NPS is limited to Rs 7.5 lakh per year.
A defined contribution plan, the National Pension Scheme (NPS), is gaining ground among investors for building a retirement kitten. Although former Treasury Secretary Arun Jaitley said in his 2015-16 budget speech that workers would be given the choice to migrate to the NPS, it stayed on paper as an amendment is required in the EPF law.
Until then, individuals can voluntarily invest in NPS by opening a Tier 1 account. Private sector workers can invest up to 75% of the money in stocks and the rest in corporate and government debt. The return for private sector employees is 10-12% year on year. Although the return earned from NPS is tax-free, an individual will be required to purchase an annuity for 40% of the term, which many investors do not find attractive as the return on annuity is around 6% and is taxed at the individual’s marginal rate .
This post Pension nest egg: with EPF rate cut, voluntary provision fund loses its charm
was original published at “https://www.financialexpress.com/money/retirement-nest-egg-with-epf-interest-rate-cut-voluntary-provident-fund-loses-its-charm/2462031/”