The Employees' Provident Fund continues to offer the best and assured interest rates in town -- jacked up to 9.5 per cent, with best wishes from the Leftists.
So it's no surprise that many salaried folk tend to invest more than the mandatory 12 per cent every month in the fund.
Yes, it's an albatross for India Inc, for they now have to dig deeper into their income streams to make good the returns shortfall. It's almost working out as additional cost to companies -- a cost that would be known only at the end of the year.
The 9.5 per cent assurance makes it so attractive that many ex-employees choose not to withdraw their monies even after having got employment abroad.
This is because companies are not permitted to pay differential rates of interest on voluntary provident fund.
After all, where else would an individual get better investment returns without the hassles of second-guessing whether or not to exit from an investment.
Where else would an individual be assured that his funds are safe even if this means the corporate entity has to make good the deficit.
Employees are today making merry ever since the government announced a higher return of 9.5 per cent on provident funds.
Employees also get a major tax break on their entire contribution to the fund. Contributions made by employees is eligible for tax rebate under Section 88 up to a ceiling of Rs 70,000, points out corporate chartered accountant, Ajit Ghosh.
"For the salaried employees who can avail of the Section 88 benefit, the return on VPF can be as high as around 24 per cent (inclusive of returns on investment and tax rebates)," says Amit Gopal, vice president, India Life Capital, a firm that manages over 150 provident funds.
What's more the amount accumulated is not taxed at the time of settlement -- that is when one resigns or retires from a company. The entire money plus the interest paid on it is therefore tax free in the hands of the employee.
So, in a volatile interest rate market, what kind of assurity does an individual get?
Those over 55 years can opt for senior citizen bonds offering 9 per cent interest -- assured for a period of 5 years. But income here is not exempted from tax.
One can also look at public provident funds, today offering 8.5 per cent return. Here an individual can get tax rebate under Section 88 of the Income Tax Act. This is even as the benchmark 10-year paper is ruling at 6.54 per cent.
Salaried employees might as well take advantage of the 9.5 per cent offer and invest maximum into the provident fund -- under the voluntary provident fund scheme.
Employees can put their entire pay package into the scheme, and earn the highest interest in the market today.
Of course, the employer would only have to put in a matching contribution of 12 per cent of an individual's basic salary.
But indirectly as the government mandates a return of 9.5 per cent, the corporate has to make good the shortfall. Today returns on most provident funds are in the region of 7-7.5 per cent.
Nowhere close to the 9.5 per cent mandated return.
What employees can do is instruct the payroll department of their company to deduct voluntary provident fund from their salary at a pre-decided rate.
This additional deduction is then added to the provident fund corpus. The employee thus earns 9.5 per cent on the entire amount, and of course the employer is not expected to match the same except for the 12 per cent mandatory deduction.
It is possible to inform the accounts department not to deduct an additional amount in certain months when expenses are expected to be higher.
The downside risk is that PF is an illiquid investment and withdrawals especially in the case of funds managed by the EPFO are difficult to make.
Withdrawal is a function of rules laid down by respective trusts. This is the case with mandatory and voluntary contributions made to the Provident Fund.
Unless of course when the individual retires, and the entire sum is then given to the individual.
Employees can take a loan against the amount accumulated in the fund, however. But once again, availing of a loan depends on permissible rules and circumstances.
Employees can access money for reasons such as housing, marriage, children's education among others. Conditions apply in this regard in terms of the number of years of being a member of the Provident Fund trust.
Cut the take-home
- Awesome return of minimum 9.5 per cent ( both with or without the Section 88 benefits).
- Effective long-term substitute for bank recurring deposits.
- Effective means for compulsive savings.
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