Is it time to raise your contribution to EPF?

With the rate rising to 8.75 per cent, the product will give better tax-free returns, notes Priya Nair

At a time when the stock market is going nowhere, the outlook on gold isn't very good and debt instruments like fixed deposits are continuing to give steady returns of eight-nine per cent, the Employees Provident Fund Organisation's increase in the interest rate to 8.75 per cent for 2013-14 is promising.

It should even encourage employees to increase their contribution to the instrument, depending on their ability to save and risk-taking ability.

This move will benefit 50 million subscribers.

Those closer to retirement, three to five years away, can explore it.

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Comparative products like Public Provident Fund offer 8.7 per cent interest (it has a lock-in period of six years and partial withdrawal is allowed from the seventh).

National Savings Certificate gives 8.5 per cent interest for five years and 8.8 per cent for 10 years.

The interest on a bank fixed deposit and tax-free bond for 10 years is eight-nine per cent. You can withdraw from the EPF for specified reasons but only after five years of continuous service.

As long as a provident fund continues to be exempt from tax at all stages, that is, investment, accrual of interest and withdrawal, it is the best option to build a retirement corpus, says Ganesh Shanbaug of SMS Financial. 

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Both the EPF and PPF score over others in terms of tax treatment.

Both are exempt from tax at the investment, interest accrual and withdrawal stages.

You can invest up to Rs 100,000 in these and claim exemption under Section 80 C.

In case of NSC and the five-year bank FDs, the investment is exempt under Section 80 C, but the interest earned is taxed.

On the other hand, investment in tax-free bonds is taxable, but the interest earned is tax-free.

"At 8.5 per cent, the EPF rate was good. Now at 8.75 per cent it is better.

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“So, it is advisable to increase your contribution to EPF,'' says Suresh Sadagopan, founder Ladder7 Financial Advisories.

The mandatory contribution to EPF is 12 per cent of your basic salary.

While you can contribute above that, the employer will not match the extra contribution.

The rise in the interest rate for the current financial year may not be available the next, as the overall interest rates are expected to come down.

The rates are a factor of market conditions and will not remain at these levels the next year, says certified financial planner Gaurav Mashruwala.

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Most financial planners also recommend that even if the EPF deductions from your salary make up for Rs 1 lakh (the exemption allowed under Section 80 C), it is advisable to continue investing in Public Provident Fund.

"If it fits in my financial goals, I will continue to have both EPF and PPF, even if the latter does not give me the benefit of tax exemption, because it is giving me 8.7 per cent in the long term and that too tax-free,'' Mashruwala says.

In November, the government had capped the contribution employees can make towards the pension component of the EPF.

This means at the time of retirement, more money will be available to the employee in the form of provident fund.