With yields on the 10-year benchmark bond crashing to 6.5% from 7.8% a year ago, it is not surprising the Employees Provident Fund Organisation (EPFO) has reduced the interest on EPF to 8.65%. Indeed, given it invests 65% of investible funds every year in government securities—it holds them to maturity—the surprise is that the cut was so small, possibly past surpluses helped in limiting the hit to subscribers. Though the Congress party has termed this the government’s second surgical strike on the middle-classes after demonetisation, the reality is EPFO’s rates are still very attractive in comparison to all other zero-risk investment products and its tax-free status increases that difference considerably. The Public Provident Fund, which has a similar tax-free status, offers 8%, but a 1-year post-office deposit offers just 5.6% and the interest on that is taxable—most bank deposits offer similar rates as the post office and their interest earnings are also taxable; 5-year NSCs offer a higher rate of interest at 6.4% and offer tax benefits under Section 80C, but the interest earnings are taxable.
Which is why reworking tax benefits for various investment products has to be a priority for finance minister Arun Jaitley’s budget—why should savings in banks be taxed while those in the EPFO are not, for instance? Given how the finance minister burned his fingers in the last budget, though, chances are he wouldn’t want to try to remove the EPFO tax advantage. Jaitley had proposed to tax 60% of employee contribution accumulated after April 2016 if it was not invested in an annuity offered by an insurance company—while this would have put EPFO on a par with the New Pension Scheme (NPS) which offers higher returns by investing more in equity, what the finance minister needed to do was to do away with the compulsory annuitisation of 60% of the NPS’s retirement corpus. One option for the finance minister could be to put a ceiling on voluntary contribution beyond the mandatory 12% of basic salary. An employee can voluntary contribute up to 100% of her basic salary in EPF account while enjoying all tax benefits—given the R1.5 lakh ceiling on the Public Provident Fund, there is no real reason to offer the well-heeled such a big tax-break.