Should you hike your PF contribution amid falling returns?

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Employees’ voluntary PF (VPF) contribution can be taken right up to 100 per cent of basic pay. However, the employer is not required to match the additional contribution made by the employee.

Many Employees’ Provident Fund Organisation (EPFO) members would not be aware that they have the choice of increasing their provident fund contribution voluntarily above the 12 percent of the basic salary that is mandatorily deducted
for their retirement corpus.

Employees’ voluntary PF (VPF) contribution can in fact be taken right up to 100 percent of basic pay. However, the employer is not required to match the additional contribution made by the employee.

But would it be wise to request your employer to deduct a higher PF amount amid falling interest rates, which forced the EPFO recently to cut down the interest rate on PF balances for 2016-17 to 8.65 percent from 8.8 percent in the previous financial year?

Leading financial planners feel PF remains one of the most attractive investment options in the fixed income category, and members can consider higher voluntary contributions. However, they should take into consideration that PF is not a very liquid investment.

“We expect interest rates to decrease in the coming years. Yet these are investments which are attractive at this point as it is backed by the government; hence, one can consider increasing investments in VPF. However, this should be done only if the financial goals are long-term with a minimum of a 5-year horizon,” Anil Rego, CEO and Founder, Right Horizons, told Moneycontrol.

Rego, however, warns that PF is not liquid and hence one cannot withdraw except under a few circumstances specified by EPFO.

Since PF investments enjoy full tax benefits being in the exempt-exempt-exempt category, 8.65 percent tax-free returns would actually be equal to pre-tax return of around 12 percent return in taxable instruments for those in the 30 percent tax bracket.

Sanjeev Govila, CEO, Hum Fauji Initiative, favours increasing PF contributions. “Even with the restrictive withdrawal regime, PF is a good fixed-income call for the long and short term taking into account the current interest rates and the tax benefits. EPFO has maintained a big margin gap between PF rates and other fixed income instruments available in the market. Hence, diverting surplus by individuals to it is highly recommended if safety is the main criteria,” he said.

In comparison to EPF, fixed deposit in banks are earning around 7 percent at present and is taxable if the tenure is below 5 years. SBI is currently offering public interest of 6.5 cent for deposits from 3-5 years, while ICICI Bank’s offer is 7 percent for deposits above 2 years to up to 5 years. Its tax saver FD also carries 7 percent rate of interest.

Returns on EPF also compares well with other small savings. In September, the government had reduced interest rates on small savings schemes by 0.1 percent for the October-December quarter of 2016-17. With this, Public Provident Fund (PPF) interest rate was reduced to 8 percent in the third quarter of the current fiscal as against 8.1 percent in the previous three months period, while the rate on Kisan Vikas Patra was brought down to 7.7 percent from 7.8 percent increasing its maturity to 112 months instead of 110 months.

S Sridharan, Business Head, Financial Planning, Wealth Ladder, suggests waiting for the next Budget before taking a final call on VPF. “EPF interest rates are in the attractive zone. The interest rate is expected to go down in the future. Investors should wait and watch for the Budget announcements since the government’s aim is to reduce the return on all small savings schemes that includes EPF,” Sridharan said.

By Sarbajeet K Sen

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