Despite the interest rate on savings via the Employees’ Provident Fund Organisation (EPFO) having been trimmed by 15 basis points to 8.65%, it remains the most attractive investment option, reports Saikat Neogi in New Delhi. What makes savings in the EPFO particularly attractive is that one can put away a reasonably large chunk of money every month. Of course, employers also make a contribution to the EPFO.
Moreover, the interest earned is tax-free. While the interest earned from saving in a Public Provident Fund (PPF) is also tax-free, one cannot invest more than R1.5 lakh annually. Given how interest rates on bank deposits have dropped — one-year money now fetches less than 7% — and given the interest earned on such deposits is taxable, the EPFO is a good place to park one’s surpluses.
The rate cut by EPFO comes at a time when yields on the 10-year benchmark bond have crashed to levels of 6.5% — a year ago these were ruling at levels of 7.8%. consequently, the government has lowered interest rates on small savings schemes such as PPF, National Savings Certificates, Kisan Vikas Patra, and Post Office Time Deposits.
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For risk-averse investors, fixed maturity plans of mutual funds (FMPs) are an attractive option since these are giving returns of 7-8%. Also, the indexation benefit makes FMPs virtually tax-free if one invests for a period of three years. In fact, FMPs offer better post-tax returns than bank fixed deposits, especially for those in the highest (30%) tax bracket. These closed-ended debt funds invest in paper with maturities that are less than or equal to that of the scheme.
Amarpal Chadha, tax partner, EY, says the reduction in the interest rate by the EPFO is reflective of the changing market dynamics, small saving schemes are showing a gradual decline in returns over a period of time. “Given that this is an assured return and non-taxable if withdrawn after a continuous service of five years, this still continues to be an attractive option for employees to save,” he says.
The PPF gives a return of 8% and the rates of every small savings schemes are reviewed every quarter depending on the bond yield. According to labour ministry sources retaining 8.8% rate of interest for the current fiscal was not possible as the retirement fund body was left with just R409 crore surplus after providing 8.8% returns for 2015-16, compared with R1,640 crore a year earlier. The Central Board of Trustees, which met on Monday, also reduced the administrative charges to 0.65% from 0.85% of basis wages earlier. It also recommended to abolish administrative charges levied in implementing the EDLI Scheme passing on the benefits of computerisation to employers.