Public Provident Fund, FD, other investment options during COVID-19: The Central government has decreased the rate of contribution to the provident fund by both the employers and employees to 10 per cent against the statutory 12 per cent.
Public Provident Fund, FD, other investment options during COVID-19: The Central government has decreased the rate of contribution to the Employees Provident Fund (EPF) by both the employers and employees to 10 per cent against the statutory 12 per cent for three months. This decision in view of the Coronavirus crisis is expected to put more money in the hands of the employees and employers, experts say. More money in hand is good for those who are in dire need of cash amid Coronavirus pandemic. However, it also means a rise in tax liability. Hence, experts suggest some smart ways in which individuals can offset the tax liability in case s/he can afford to invest.
Gautam Sehgal, partner, Risers Accelerator, told FE Online that PF contribution cut will increase the take-home amount for the salaried employees. This way, they will have more funds in their account for immediate requirements.
Sehgal said that the employer’s salary portion of two per cent, which was earlier being cut will be paid out as salary to them as there is lower deduction now, therefore, employees will get a slightly higher payout. But it may also lead to more payable tax.
Sehgal further suggested, “If one does not have an immediate need for the money, they can think about investing in PPF and FDRs. The Public Provident Fund is a smart option, especially in the current scenario, because of the attractive interest rate, safety features like government guarantee and benefits like tax-free interest and maturity. FD on the other hand offers a higher rate of interest than a regular savings account; hence, it is also a good option. The smart thing to do in this situation is to maintain your liquidity right now for opportunities that will arise in the near future.”
Harsh Jain Co-founder and COO, Groww, said that reducing the statutory PF contribution from 12 per cent to 10 per cent for all establishments covered by the EPFO for the next three months would mean “a hike in the take-home salaries of employed professionals across the board. This is good news for employees in the current situation where many organizations have resorted to salary cuts to reduce costs.” Jain shared the following tips to make the most out of this extra money in hand:
- Build or reinforce an emergency fund – The lockdown has highlighted the need for an emergency fund in our fast-paced lives. Individuals with a healthy reserve of cash in an emergency fund are better positioned to manage such situations. Hence, individuals need to look at strengthening their emergency fund (if they have one) or start building one now. A few options to look for special accounts which offer a higher interest rate and liquid funds.
- Try to reduce debts – The economy is in unchartered waters. Hence, it is prudent to be prepared for the worst while hoping for the best. With job cuts happening across industries, if someone was to lose their job, then having lower or no debts can be better than having high EMIs to pay every month. Hence, people with overdue credit card bills or high-interest loans must endeavour to repay them with this extra money in hand.
- Liquid funds for better returns and easy liquidity – For people who have enough cash reserves in their emergency fund and minimal debt, investing this surplus in a liquid mutual fund can be beneficial. With easy liquidity and returns better than savings accounts, these funds are a good option for short-term investments.
- High-quality equity funds for long-term goals – If liquidity is not a concern, then the individual can use these extra funds to start a systematic investment plan (SIP) in a diversified equity fund for long-term benefits. The investor must choose a fund that invests in fundamentally strong companies that can weather this storm.
“While the government is trying hard to make this situation less damaging to people (financially), using these packages wisely can go a long way in maximizing their benefits. Every individual must consider his financial position and use the extra salary to his benefit,” Sehgal concluded.