Can EPF interest help in building a strong retirement corpus?

is deposited annually

By law, both employer and employee must contribute 12% of the monthly payment EPFOIf Basic Pay (and Dearness Allowance) is less than 15,000. Employers of workers with basic wages more than 15,000 per month can limit his contribution to 12% 15,000 or 12% of the actual basic pay. Normally, 8.33% of the employer’s share is contributed towards the Employees’ Pension Scheme and the remaining 3.67% is contributed towards the EPF Scheme.

An employee can contribute more than 12% of his salary in PF. It then becomes part of the Voluntary Provident Fund (VPF). Unlike EPF, there will be no equal contribution from the employer in this case. Since VPF is an extension of EPF, the rules regarding interest calculation, withdrawal and taxation are similar to EPF.

Interest is declared on the accumulated EPF account balance and credited after the completion of one financial year at the rate recommended by the EPFO.

If you exit the workforce before the age of retirement, the balance in your PF account continues to earn interest till the age of 58 (except when the subscriber dies or migrates abroad), but without any tax benefits. For starters, interest on annual PF contribution 2.5 lakh per annum ( 5 lakh if ​​the employer’s contribution is nil) is exempt from tax.

There are three steps to calculate interest on EPF balance. Let us see how the interest is calculated for FY22. In the first step, interest is calculated on the EPF balance on the last day of the previous year. In this case, the balance in the PF account up to the end of FY 2011 (March 2021) is taken into account.

Thereafter, in case of any withdrawal, interest is calculated from the beginning of the current year to the month preceding the month of withdrawal. Suppose, you made a withdrawal (partial or full) in September 2021, the interest on that withdrawal amount will be calculated from April 2021 to August 2021.

In the last step, interest is calculated on all contributions made during the year – interest from the month when the fund is credited at the end of the current year. So, if you put some money in your account in April 2021, the interest will be calculated from May 2021 till the end of the financial year, or March 2022, (for 11 months).

The interest calculated based on the above steps usually gets accumulated after a few months from the end of the financial year. Even if the PF interest gets credited to your account, it is considered as a deposit at the end of the financial year. For example, interest on PF for FY 2011 was credited to customers’ accounts only in December 2021. However, for the purpose of calculation of interest for FY 2012, the part of PF closing balance till the end of FY 2012 is considered. , According to KE Raghunathan, representing employers on the central board, “interest becomes part of the closing balance for the relevant financial year and, therefore, there is no loss to the member due to any delay in the declaration of interest rate.” Trustee.

Also, on exit from the EPF scheme, the last declared interest will be applicable on the final payment for the outgoing members.

retirement fund

EPF is considered a traditional retirement savings product for the silver years. Therefore, the interest rate declared every year attracts a lot of attention. Irrespective of the high or low interest rate on PF deposits, you should not completely depend on EPF corpus for your retirement needs.

EPF is tax-efficient with Exempt, Exempt, Exempt (EEE) status. It enjoys tax benefits on contributions, interest earned and withdrawals, but with certain limitations; Interest earned on PF contribution ends from April 2021 2.5 lakh is taxable. Also, the employer’s contribution to PF, National Pension System (NPS) and retirement fund exceeds 7.5 lakh will be taxable as perquisite in the hands of the employee.

EPF currently offers attractive interest rates along with government-backed guarantees. However, experts suggest that investors should not go overboard and suggest a combination of equity and debt for retirement funds. Experts also suggest investing in equity mutual funds for the long term to offset the losses due to the low interest rate announced by the EPFO.

Anupama Aggarwal said, “If one has a target corpus for retirement and now wants to cover the deficit, with the reduction in interest rates, they can consider investing in equity MFs or NPS.” Senior Vice President – Consultant at International Money Matters Pvt Ltd.

Praleen Bajpai, Founder, Finfix Research & Analytics suggests investing in broad-based index funds. “Back to cover calculation, even if investors increase any of their exiting equity SIPs 2,000, it will be able to generate enough funds to fill the gap created by the reduction in interest rates by the EPFO.”

Going forward, the low interest rate regime cannot be ruled out.

“As the economy progresses, interest rates will gradually go down,” said Rishabh Desai, founder of Rupee with Rushabh Investment Services.

“When a youth is calculating on the EPF corpus today, they can expect an average of 6-7%,” Bajpai said.