Employee’s Provident Fund: It’s better if you don’t allow the extra available cash to lay idle, following the proposal, and invest in inflation-trouncing instruments to secure your post-retirement years.
By Rahul Jain
The recent proposal mooted by the Labour & Employment Ministry to reduce employee’s contribution towards their Employee’s Provident Fund (EPF) to raise in-hand salary has made workers smile. The move ensures a high take-home salary. The initiative can be seen in various lights. This article will decipher the minute aspects of this proposal and analyse what it has in store for you.
1. Flexibility to invest more
Prudent investments are necessary to attain financial freedom and build a corpus towards various life goals. However, most of us fail to do so, citing the lack of cash-in-hand as a reason. The proposal eliminates this roadblock and gives you an opportunity to invest in the available financial instruments to accumulate wealth.
Note that currently, employees and employer contribute 12% each (total contribution 24%) towards EPF. If you work in an organisation with a workforce of more than 20 people and draw a salary of at least Rs. 15,000, Rs. 1800 goes towards your EPF every month. Your employer contributes an equal amount. So, every month Rs. 3600 goes towards your EPF.
Now, if it’s reduced to, let’s say, half at 6% your contribution towards your EPF comes down to Rs. 900. The extra Rs. 900 can be invested in an equity mutual fund via systematic investment planning (SIP). Setting up a SIP of Rs. 900 per month in an equity mutual fund offering annualised returns of 12% can help for a period of 30 years can help you garner a corpus of over Rs. 31 lakhs.
2. Unexpected expenditures
Unexpected and extra expenses might crop up anytime. While financial prudence calls for building an emergency corpus for the same, often most people fail to do. In such an event, there’s no option but to bank on existing savings.
However, readily accessible cash can bail you out of tight situations. You can use it to address these unplanned expenses and not break into your savings. The proposal, if implemented, thus cushions your savings from taking a plunge in case unwanted expenses crop up. Thus, this move can be a blessing in disguise for those who tend to give emergency corpus a miss.
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3. May lead to discretionary expenses
An increase in cash-in-hand may bring cheers, but it’s essential to note that liquid cash tends to evaporate faster. Higher employee contribution led to automatic and forced savings, which will not be the case in case of reduction in the contribution of the employee. Note that you get your salary after deduction of the EPF contribution.
If you aren’t disciplined enough, the extra cash-in-hand may go towards discretionary expenses, without adding any real value to your wealth and straining your finances. Investing money on non-essentials can put you in a tight spot.
4. Reduction in size of retirement nest
EPF is one of the major investment avenues to build a retirement corpus. The money invested in your EPF account earns interest, decided by the government, which currently stands at 8.65%. When the amount invested is more, the end corpus would automatically be on the higher side.
On the other hand, if your contribution goes down, the amount invested would come down drastically, thereby deflating your retirement nest.
For example, if you are 30 now and wish to retire by 58, equal contribution of Rs. 1800 by you and your employer, assuming your salary to be Rs. 15,000 per month, would help you amass a corpus of a little over Rs. 47 lakhs at the current rate of EPF interest. If your contribution comes down to 6%, the final amount would be a little above Rs. 33 lakhs. It’s a loss of approximately Rs. 14 lakhs.
With inflation having a decompounding effect on wealth, the real value of the retirement corpus will come down even more, which is something you wouldn’t want once active income stops.
To sum up
A little prudence on your part can help you better utilise the proposal. You can automate the extra cash available into financial instruments such as mutual funds for wealth accumulation and enhance your riches. So, it’s better if you don’t allow the extra available cash to lay idle, following the proposal, and invest in inflation-trouncing instruments to secure your post-retirement years.
(The author is Head, Personal Wealth Advisory, Edelweiss. The view expressed are personal)