EPF Rate For 2016-17 Fixed At 8.65%

Yesterday, the EPFO fixed the rate of interest for EPF Member Accounts for 2016-17 at 8.65 per cent. While this marks a 15-basis point drop from the 8.80 per cent pay-out made in the previous fiscal, it does lay to rest some concerns that had existed among some employees, who had been speculating a lower pay-out rate than the 8.65 per cent that was approved by the EPFO trustees late last year.

EPF rates have been lukewarm for the better part of the millennium. The rate of interest stood at a high 12 per cent all the way from 1990 until 2000. The rate has never been higher than 9.5 per cent since 2002.

The last fiscal had been rife with debate regarding whether it would make sense to switch from EPF to NPS (National Pension Scheme), especially considering the rolled-back decision to tax EPF accounts at withdrawal in the Union Budget 2016. The tax efficiency afforded by EPF does, in fact, make it an option worth considering for low risk savers.

Given that there could be further rate cuts this fiscal as inflation related concerns start to wean, it's unlikely that the rate of return for the current fiscal will be any higher. EPF's invest the lion's share of their corpuses into fixed income securities (as high as 90 per cent). Until 2016-17, EPF's were permitted to invest only 5 per cent of their corpus into the equity markets; this was hiked to 10 per cent only recently.

Savers need not be alarmed by the falling rates, though. Even 8.65 per cent, tax free, works out to a taxable long term return of close to 10 per cent per annum from a debt oriented, hybrid mutual fund of a similar asset allocation (accounting for tax efficiencies created by indexation). That's not a raw deal by any terms.

EPF taxability remains a politically contentious issue, and it's highly unlikely that any efforts to tax the accumulated corpus at withdrawal will eventually come to fruition. The higher return potential afforded by NPS accounts notwithstanding, one shouldn't be in a hurry to switch moneys into it from their EPF accounts, given the former's lower tax efficiency and the inbuilt clause that mandates an annuity purchase with 40 per cent of the corpus. Annuity incomes, already woefully low, are also taxable to boot.

If you're an EPF investor, you could face a further rate cut in FY18. However, don't be in a hurry to switch funds into an NPS account. Rather, you could divert a portion of your long term monthly savings into equity oriented Mutual Fund SIP's that have the potential to generate a significantly higher long term return. Why concentrate most your long-term retirement savings into what is by and large, a fixed income instrument? Risk aversion could cost you dearly eventually. It may just be an opportune time to look beyond both EPF and NPS!