Add more to PF for tax-free returns
Mr Vinay is a happy man. Set to retire in 5 years, the recent announcement of increase in the interest rates of Employee’s Provident Fund ( EPF ) rates to 9.5 per cent (from the existing 8.5 per cent) will increase the corpus of retirement money. During the period 1989-2002, interest rate used to be 12 per cent, which had come to 8.5 per cent, the interest rate for the past 5 years.
Mr Vinay being a conservative investor, the drop in rate had effected him. The provident fund deposits are invested in government securities and bonds and since this is backed by a sovereign guarantee, conservative investors prefer this route.
The increase in rates has made the PF returns more attractive than small saving schemes such as Public Provident Fund (PPF) , which guarantees a return of 8 per cent.
In such a scenario, it would be a good idea to increase one’s contribution to PF . And if resource is the constraint, then one could also reduce the PPF contribution and increase the PF contribution. A tax free additional return of 1.5 per cent, should not be missed.
Now, the employees can increase their contribution voluntarily, up to 100 per cent of the basic to EPF. (The employer and employee together contributes 24 per cent of the basic salary — with the employer contribution being 12 per cent) Any incremental employee contribution above 12 per cent is not matched by the employer. The incremental contribution deducted from the employee goes into a separate fund called voluntary provident fund.
This particular action, can be more beneficial to the people in the lower salary bracket. Besides, as a part of asset allocation, if liquidity is not a constraint, increasing the contribution to PF, would be a good move to generate additional tax free guaranteed return.
Moreover, as part of the financial planning exercise for retirement planning, the voluntary contribution to PF, to a risk averse conservative investor is an option to be explored. To state an illustration, A regular monthly investment of `1,000 for 15 years at 8 per cent per annum, compounded monthly, will result in corpus of `3.40 lakh. And at 9 per cent per annum, compounded monthly, will result in corpus of `3.70 lakh. So on a total investment of `1.80 lakh (1000*15*12), the additiona l per cent return, generates an additional corpus of `0.30 lakh (`3.70-`. 3.40).
Now this largesse in rate is only for the current year, i.e 2010-11. And there is no guarantee that this rate should be in force in the succeeding years. However, as the saying goes, Make hay while the sun shines. And it would not be a bad idea to increase the voluntary PF contribution for the current year.
(The writer is the founder of WealthWays Private Wealth Management.)
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