Though this needs to be approved by the Finance Ministry before it becomes binding, savers are hopeful that the proposal will go through especially because we are heading towards a general election and the chances of the ministry rejecting it are remote.
As expected, employee unions are rejoicing over the proposal. “We are very happy about this rate increase because it will directly benefit all EPFO members,” says Virjesh Upadhyay, general secretary BMS, and also an EPFO board member. The total subscriber base of EPFO is estimated to be around 6 crore.
In addition to their normal contribution, employees can benefit from this higher interest rate by voluntarily contributing more – i.e. through Voluntary Provident Fund (VPF). Since VPF generate same interest as EPF, it has become even more compelling now. More importantly, the rates offered on EPF are about 1% higher than other options.
Comparable debt options with 80C benefit
|Option||Taxability of interest||Interest Rate (in %)|
|Public Provident Fund (PPF)||Tax free||8|
|EPF / VPF||Tax free||8.65|
|Bank FDs (average rate)||Taxable||7.5|
|5 Yr NSC - VIII Issue||Taxable||8|
Source: ETIG Database
“Since this risk-free and tax-free investment option is generating better returns, VPF is a great retirement planning tool and therefore, it should be there in the debt portfolio of all salaried employees,” says Mrin Agarwal, founder director, Finsafe India.
VPF is also available for deduction under section 80C and therefore, can be a good tax planning tool. While there is a limit of Rs 1.5 lakh per annum for investment in Public Provident Fund (PPF), there is no such restriction in VPF.
Flexibility and convenience are other advantages of VPF. “Since VPF happens through salary deductions, investors find it convenient. Most companies allow employees to start, stop, increase or decrease their VPF contributions twice a year,” says Agarwal.
However, one should not ignore the fact that VPF comes with withdrawal restrictions and full withdrawal possible only at the time of retirement. Savers also should not ignore their goals and asset allocations while increasing their VPF contributions.
Young people are supposed to have higher equity component and low debt component, so VPF may not be a great option for them (ie their debt portion may get full through EPF itself).
“VPF is a very good option for people with higher age and who want to increase their debt portion by reducing equity portion. They can do this by increasing their VPF contribution and reducing fresh equity investment by same amount”, says Melvin Joseph, founder, Finvin Financial Planners.
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2 Comments on this Story
Sardar Singh243 days ago
good comprehensive article by Narendra; if he can also depict in tabular format *) c benefit and max limit; it will be great
Krishnamoorthy Venkataraman696 days ago
The increase in interest rate is welcome.As the collected funds are invested in market related instruments ,without any guarantee of the interest and repayment of principal, the extra subscription can be directly put in PPF. this will also help the subscriber to have a window to continue to subscribe to avail all the tax-rebate benefits,if the same is required after retirement.so instead of VPF the members can open a PPF account and put that money