EPF still top scorer despite cut in interest rate to 40-year low – 5 Reasons


Photo source: PTI (file)

EPF lowers a dark horse interest rate for less than 40 years – 5 reasons

EPF Interest Rate 2021-22, EPF interest rate cut: The Employees Provident Fund Organization (EPFO), which is responsible for controlling and managing future funds in the country, has reduced EPF interest rates to a 40-year low of 8.1 percent for the 2021-22 financial year, further increasing the payroll class Near pain. The interest rate for the 2020-21 financial year was 8.5 percent.

Although the announcement was made on May 3 after the approval of the central government, Finance Minister Nirmala Sitharaman strongly defended the EPFO’s decision to cut interest rates in March. He told the Rajya Sabha that the rate was determined by today’s reality where interest rates on other small savings instruments were even lower. To sue her, Sitharaman cites returns on government-backed small savings schemes that offer secure and guaranteed returns.

Sitharaman is right. A quick comparison between the government’s micro-savings scheme and the EPF’s interest rate shows that the latter is a lucrative destination for parking funds for a fixed return.


Public Provident Fund (PPF), Sukanya Samridhi, Senior Citizen Savings Scheme (SCSS), State Bank of India (SBI) Ten Year Fixed Deposit, Time Deposit Scheme like Post Office Savings Scheme (like National Bank FD), Monthly Income Scheme, Savings certificates like certificates and Kisan Bikash Patras are considered as time-tested and safe mode of investment. These schemes do not offer quick returns, but in return, they are much more secure (due to government support) than schemes associated with the equity market.

India TV - Interest rates on government-backed projects

Photo source: India TV

Interest rates on government-backed projects

It should be noted here that the yield on 10-year government bonds is currently below 7%.

EPF Historical Return

In FY 1952-53, the EPF interest rate was 3% which gradually increased to 8% in 1977-78 and then to 12% in 1991-92.

It is pertinent to mention here that the EPF contribution has been increasing steadily since 1952-53 when the total basic wages, DA and food allowance of Rs 1 per annum was payable by both the employee and the employer.

India TV - EPF Historical Return, EPF Interest Rate Chart

Photo source: India TV

EPF Historical Return

EPF is the best bet – 5 reasons

1. Mandatory section

EPF contribution is mandatory for a salaried person. As a rule, 12 per cent of basic salary and dearness allowance is credited to EPF account every month. You have no choice but to stop contributing. You save regularly regardless of your wishes. This mandatory clause allows EPF to score higher than other schemes.

This is a win-win deal for those who are making additional investments (over 12%) in the Voluntary Provident Fund (VPF).

2. Contribution

Contributions to EPF accounts are also made by employees and employers. The employer deposits money directly into the employee’s EPF account on a monthly basis. Although the employee contributes 12% of the basic salary and dearness allowance, the employer also contributes a similar portion of the employee’s salary (8.33% towards the pension scheme and 3.67% towards the EPF). Accordingly, the total contribution to an EPF account becomes 24%.

3. Compound interest

EPF interest annual compounding. To make it easier, you earn interest on the interest earned on the contribution. Again, this makes EPF a lucrative destination for parking funds to get a handsome return.

Although interest is calculated every month, it is credited at the end of the financial year.

4. Tax benefits

EPF is also giving tax benefits! It is considered one of the most tax-efficient tools.

It enjoys the status of Exemption, Exemption, Exemption (EEE). Contributions here are deducted from an employee’s salary and no tax is levied on the amount. Contributions may be claimed under section 80C of the Income-tax Act. Also, the amount of interest or maturity earned is absolutely tax-free.

Starting from 2021-22, the government has introduced a clause where interest earned on EPF contributions above Rs 2.5 lakh is taxable.

Other government-backed small savings schemes also offer tax benefits similar to the EPF. But schemes like SCSS and FD are taxable.

5. Retirement

EPF is a traditional tool for saving for retirement. In fact, it is the path to a faithful retirement plan. The more you contribute, the more you generate. Also, you save tax in three stages – contribution, interest collection and withdrawal.

The entire corpus can be withdrawn after retirement (in some cases it is withdrawn before retirement).

Where are EPF contributions invested?

EPF is primarily a credit product. Funds are mainly invested in debt products such as government securities. In 2015, EPFO ​​was allowed to start investing in equities, but with a limit. Statutory firms were initially allowed only 5% exposure to equity. In 2017 the limit was increased by 15%.

Read more: Government approves 8.1% EPF interest rate for 2021-22, lowest in 40 years

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