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3 Key points to note about your provident fund - Outside View by PersonalFN
 
 
3 Key points to note about your provident fund

All salaried individuals working in organizations registered under the Employees Provident Fund Organization, contribute monthly to their Employees' Provident Fund (EPF). But it has been observed that not all individuals know the features of the EPF, the current interest rate, withdrawal possibilities, or even what their monthly contributions are - from their own salaries and also from their employers!

The EPF corpus that you build over your entire working life can be a significant contributor to your retirement wealth, so it is advisable to know how much you are investing in this salary-friendly instrument, and also it is essential to know the key features of the EPF, including taxability.

Let's get started with the 3 main things you need to keep in mind about the EPF.

  1. What does the EPF comprise of and how is your monthly contribution broken up?

    The EPF is split into 3 parts, and this is where your monthly contribution goes.
    First there is the Employees' Provident Fund contribution.
    Second, there is the Employees' Deposit Linked Insurance Scheme contribution.
    Third, there is the Employees' Pension Scheme contribution.

    As an employee, your contribution goes straight towards your Provident Fund.
    Your Employer's contribution gets split across the above 3 categories.

    The break up is given below.
    Employee:
    12% (of Basic + Dearness Allowance) into EPF
    This comes out of your salary.

    Employer:
    3.67% into EPF
    8.33% into EPS
    0.5% into EDLIS
    1.1% for EPF Administrative Charges
    0.01% for EDLIS Administrative Charges
    The above contributions (calculated on your Basic +Dearness Allowance) are borne by your employer.

    Also keep in mind that the interest you earn on your EPF is completely tax free. And when you retire, your maturity proceeds are also not taxed. This makes this instrument very salary-friendly.

  2. How has the EPF interest rate moved historically? How is interest credited?

    Historically, EPF interest rates have moved as follows:
    Year % Rate of Interest Announced % Change
    1981-82 8.50% -
    1982-83 8.75% 0.25%
    1983-84 9.15% 0.40%
    1984-85 9.90% 0.75%
    1985-86 10.15% 0.25%
    1986-87 11% 0.85%
    1987-88 11.50% 0.50%
    1988-89 11.80% 0.30%
    1989-90 12% 0.20%
    1990-91 12% 0%
    1991-92 12% 0%
    1992-93 12% 0%
    1993-94 12% 0%
    1994-95 12% 0%
    1995-96 12% 0%
    1996-97 12% 0%
    1997-98 12% 0%
    1998-99 12% 0%
    1999-2000 12% 0%
    2000-01 11% -1.00%
    2001-02 9.50% -1.50%
    2002-03 9.50% 0%
    2003-04 9.50% 0%
    2004-05 9.50% 0%
    2005-06 8.50% -1.00%
    2006-07 8.50% 0%
    2007-08 8.50% 0%
    2008-09 8.50% 0%
    2009-10 8.50% 0%
    2010-11 9.50% 1.00%
    2011-12 8.25% -1.25%
    2012-13 8.60% 0.35%

    Currently, for the financial year, your EPF is earning 8.60%, which is higher than last year (8.25%) but lower than 2 years ago (9.50%).

    The Central Government revises the interest rate given on the EPF, as it does on the Public Provident Fund, every year in the month of March/April depending upon the revenues in the EPFO made from its earlier years' deposits. This year Labour Minister Mallikarjun Kharge announced a 0.35% increase in the EPF interest rate. This will benefit everybody covered under the EPF Scheme.

    The interest of EPF gets credited to the members account on monthly running balance with effect from the last day in each year.

  3. How should I structure my EPF contribution, from a larger life goals perspective?

    For a salaried person, contributions to the EPF offer a lot of benefits - it offers you safe returns, being one of the safest debt instruments available in India. It benefits from a good tax status, being E-E-E, or exempt-exempt-exempt. And it offers the equivalent of a high pre-tax rate of guaranteed interest - earning 8.60% tax free is the equivalent of a 12.28% interest rate considering someone paying 30% tax.

    However keep in mind, this is a very long term instrument. If you have short term financial goals, don't try to fund it by withdrawals from your EPF. If your goals are in fact primarily short term, as is the case with young couples, or parents funding their children's educations in a few years, you might want to consider only investing the minimum amount in your EPF, and channelizing your remaining funds towards a more liquid instrument, keeping your risk appetite and goal time horizon in mind.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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