EPF rate to stay at 8.5% - Part 1

The Central Board of Trustees of the Employees Provident Fund (EPF) have recommended payment of 8.5% pa.a interest to the members of the fund for 2006-07. So what does this mean for a long term investor who contributes more than what is mandatorily required to be contributed by the employee as per the rules stipulated in India (Employees have to compulsorily put 12 per cent of their monthly salary of up to Rs 6,500 in the EPFO). Let us see if it is still worthwhile to invest in EPF and compare it with other alternatives (read as competitors) that one has got at this point in time.

Given below are some of the key considerations when one invests in EPF over and above the mandatory minimum as stipulated by the Government of India.

1. Typically investments are considered as long term with little or no liquidity i.e. one cannot withdraw money easily before retirement though one can withdraw certain amount as specified by the EPF board for some purposes that have been identified by them such as child’s marriage, repayment of home loan, medical emergency and a few more.
2. Interest earned on the deposit is tax free and hence the compounding effect over long terms of time is beneficial.
3. One will get income tax benefit under Sec 80C of the Income Tax act.
4. Withdrawals are tax free at the time of retirement.
5. With the government taking some steps on pension reform, this instrument could get better and could give scopes for higher return.

Thus for investors who are investing for long term point of view, a guaranteed return of 8.5% is good for the moment.

However, there are competing products that do not give such guaranteed returns but have performed equally when compared with the returns generated by EPF and at the same time provide other benefits. We will look at the same in the next part of this series.