In a fresh blow to investors, the Union government recently approved the new interest rate of 8.1 percent on employee provident fund (EPF) deposits for 2021-22, which is the lowest rate in 43 years.
In March, the Employees’ Provident Fund Organisation (EPFO) had reduced the interest rate on deposits to 8.1 percent for 2021-22 from 8.5 percent in the previous year.
This is the lowest interest rate since 1977-78, when the EPFO had awarded 8 percent to employees for their deposits.
Despite the rate cut, EPF is still a key investment option for individuals looking to build a retirement corpus. At present, the 8.1 percent interest for EPF is higher than the rates offered by other fixed income instruments. Investors also get tax benefit on interest earned on contributions up to Rs 2.5 lakh a year.
“The EPF remains a boon for the salaried class. It offers a full 1 percentage point more than the PPF, which also has an investment cap of Rs 1.5 lakh a year,” Economic Times quoted Kalpesh Ashar, founder of Full Circle Financial Planners, as saying.
Here’s a look at some other investment options that investors can explore:
Equity-Linked Savings Scheme (ELSS) funds
The Equity Linked Savings Scheme (ELSS) comes with a three-year lock-in period and is an income tax saving instrument like the EPF. An individual can claim tax deductions up to Rs. 1.5 lakh under Sec 80C of Income Tax Act by investing in ELSS. However, the realised gains on these pure equity funds over Rs 1 lakh are liable to long-term capital gains of 10 percent.
Public Provident Fund (PPF)
If the investor is thinking of saving taxes and building a retirement corpus, they can consider the Public Provident Fund (PPF) which is a broader fixed-return investment scheme. As compared to other fixed investment instruments like RBI floating rate savings bond, National Savings Certificate and five-year fixed deposits, the PPF gives a higher return on investment at 7.1 percent. Both PPF and EPF are backed by the government. However, PPF will give fixed returns over 15 years and has an annual investment limit of Rs 1.5 lakh. It can be extended in blocks of five years after completion of 15 years.
National Pension Scheme (NPS)
The NPS is mandatory for central government employees and some government officials. However, others can use it to accumulate a bigger retirement corpus. Apart from the tax benefit, there are multiple other advantages of contributing to the NPS. It has flexibility in asset allocation and automatic rebalancing. The key thing that distinguishes NPS from EPF is that the investor can choose a fund manager for the NPS and not with EPF. Also, only employees can invest in the EPF, while all individuals can open an NPS account.
NPS subscribers can choose from two investing modes—Active choice and Auto choice. Under the active choice, the investor can choose to split the investment between equity, government bonds, corporate bonds and alternative investments. Asset mix under auto choice is determined as per the age of the investor. Here, the equity exposure reduces as the investor turns older.
National Savings Certificate (NSC)
Although, the National Savings Certificate (NSC) is giving only 6.8 percent return, it is still one of the most popular small savings instruments that come with tax savings and guaranteed returns. This fixed income asset is available at post offices and can create a regular stream of monthly income post retirement. Minimum investment required for this instrument is Rs 1,000 per annum.
Experts have often advised investing beyond fixed income assets like EPF as it is a debt instrument, which allows on 15 percent of fresh inflows to be invested in equities. Fixed income investments should be augmented with equity-linked vehicles to enjoy inflation-beating returns in the long run. Equities can generate inflation-beating returns on long-term investments. As on May 31, 2021, the EPFO earned 14.67 percent annualised returns on an investment of Rs 1.23 lakh crore in equity ETFs. Returns could be similar higher for an individual saving for retirement than what fixed income instruments like EPF can offer.
(Edited by : Sudarsanan Mani)
First Published: IST