Retirement body EPFO (Employees Provident Fund Organisation) has decided to lower the interest rate on provident fund deposits for FY2017-18 to 8.55% from 8.65% in FY2016-17. This is contrary to expectations that EPFO may retain its existing interest rate on PF for FY2017-18 at its meeting this month. This is certainly bad news for crores of EPFO members who depend on their EPF corpus for retirement. The question, however, is how will the salaried people now get affected and what should they do in such a situation?
Financial experts are of the view that despite a reduction in the EPF interest rate, it is still very attractive. “A small revision of 10 basis points in EPF rates does not change the attractiveness of this very safe and easy-to-invest product. Keeping in mind that interest rates are anyway around 7% for fixed deposits and other fixed income products, the 8.55% return backed by government guarantee still looks very attractive. Moreover, these returns are tax-free,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Another factor to keep in mind is that EPF contribution is still mandatory for a large number of salaried employees in India and they can’t do anything about it unless their organisation allows them to switch to some other option like NPS. Added to this is the fact that EPF interest rates keep changing from time to time. So, one should be prepared for this change.
“With EPFO reducing interest rates, the earnings on the PF balance next financial year will surely be lower. Though interest rates are declared by EPFO, this change shows that subscribers should not expect only high interest rates from EPF,” says Jitendra P S Solanki, a Delhi-based financial planner.
Some financial experts say that EPF still gives the best rate compared to other government instruments like PPF, NSC and KVP. So far as NPS is concerned, “NPS may still provide a relatively higher interest on the total corpus, but is ideally not an alternative to EPF as both of them serve different purposes. For instance, while EPF gives guaranteed return, NPS gives market-linked return. In fact, both of these should complement each other in terms of retirement plans,” says Adhil Shetty, CEO, Bankbazaar.com.
As far as liquidity is concerned, both are relatively non-liquid investments, but Tier-II NPS accounts have more flexibility in terms of withdrawal.
Other Investment Options
Experts say that while EPF is mandatory for salaried individuals, the contribution may not be big enough for generating a sufficient retirement corpus. One should, therefore, not depend entirely on EPF for generating retirement corpus and should look at some other options also. For instance, one can look at other avenues like mutual funds while planning for long-term investment. “Equity markets, equity mutual fund schemes, gold, gold ETFs and property are also good options. However, all these options carry the risk of loss of capital,” says Kapur.
People should contemplate investing in products like ELSS while they are young and take advantage of tax benefits while earning higher returns. “As they head towards retirement, the lump sum amount redeemed from these funds can be parked in low-risk instruments like bank fixed deposits, where the interest may be low but keeps your savings intact. Alternatively, one can also opt for Liquid Funds, as they come with very low risk and options for a diverse portfolio,” says Shetty.