Get higher returns from your EPF now…

The Employees’ Provident Fund Organisation (EPFO) is set to invest up to 5% of its incremental corpus in the equity market. The investment will be done through exchange-traded funds (ETFs), most likely in a basket of Nifty stocks. The details are expected soon. 

What does this mean for Employee Provident Fund (EPF) investors? Some experts feel that this will not be a game changer as the allocation to equities is small. 

“The 5% allocation to equities will not make a significant difference to returns. NPS, which offers a maximum exposure of 50% in equities, still has an edge over the EPF portfolio,” said Kiran Telang, a certified financial planner.  

However, she adds that EPF makes sense for customers who will not invest more than 20% in NPS because of the favourable tax treatment that the former enjoys and the extra returns from the 5% allocation to equity. Investments in EPF are exempt-exempt-exempt (EEE), while those in NPS are taxed during withdrawal. 

The EEE tax status means the contribution, the accumulation and the withdrawal amounts are all exempt from tax.

Others feel that it is good that the EPFO has taken its first step towards investment in equities. 

“It’s a beginning and will prove useful in the long run considering that there’s no social security system in the country,” said Hemant Rustagi, CEO, WiseInvest Advisors. “Over a period of time when you see your EPF portfolio growing, more and more investors may be encouraged to look at equity in other parts of their portfolio.”  

According to Rustagi, assuming 15% returns in equities, the 5% EPF portion could make incremental gains of 0.35% in a year over the existing EPF investments. Over a long period of, say, 30 years, this will lead to gains of about 13-15%. “This could significantly boost the EPF corpus for young individuals,” said Rustagi. 

Employee Provident Fund is a retirement benefit applicable only to salaried employees, wherein both the employee and the employer contribute 12% of the former’s basic salary amount each month. Those who want to contribute more than 12% of their basic salary, can do so through Voluntary Provident Fund (VPF), whose corpus becomes part of EPF. However, there will be no matching contribution from employers in this fund.

Rustagi feels that one should not put money through the VPF just because the EPF may earn higher returns now. According to him, investors should combine EPF with other investment options such as equity-diversified funds, retirement plans from mutual funds, public provident fund and NPS to plan for retirement.