Fintotal News Analysis | The Provident Fund Becomes More Attractive
The Provident Fund Becomes More Attractive
Ruby Jacob, 16 Sep 2010

What's happening?

The interest rate paid on Employee Provident Fund (EPF) for the Financial Year 2010-11 will be raised to 9.5% (from 8.5% earlier). Remember that this interest is tax-free, so that makes it a clear winner as of now in terms of risk-free savings options that are available. A formal okay from the Finance Ministry is pending, but this should be passed soon. A proposal to allow part of the EPF to invest in equity (currently it is fully debt) has been shelved for now.

The EPF is the fund most salaried employees have accounts in - part of it is deducted from your salary, and part is contributed by your employer. Each contribution is usually 12% of your basic salary, the so called regular PF. You can contribute up to 100% of basic salary voluntarily, but the employer contribution needs to match only 12%.

What does it mean for me?

This is good news for you - it provides a great return on this part of your long term savings. Do make sure you are availing of the EPF in your organization. You can see from your salary slip or from your Finance department the details of your money going into EPF. If you are over 45 years of age (and hence relatively nearer to retirement), you can even increase your contribution beyond the minimum 12%.

The 9.5% tax-free return that the EPF will now give is higher than the Personal Provident Fund (PPF) return of 8%, the National Savings Certificate return of 8% and the Kisan Vikas Patra return of 8.31%. It is also far higher than the Bank fixed deposits that yield only about 7%-7.75%, and are taxable too.

The lock-in in the EPF means that you cannot utilise this for short-term savings. Yet, the good interest rate and security of the EPF make it one of the best vehicles for retirement savings today. In addition, the lock-in is actually a positive, since it curbs the usual tendency to spend and fritter away savings.

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