“This is despite the fact that the EPFO
has consistently followed a conservative approach towards investment, putting the highest emphasis on the safety and preservation of the principal. The risk appetite of the EPFO
is very low, since it involves investing the poor man’s retirement savings also,” an official statement said.
From 2015-16, the EPFO
started investing in equity through exchange traded funds (ETFs) based on the Nifty50 and the Sensex. The investment in equity assets started from 5 per cent for FY15 and subsequently went up to 15 per cent of the incremental portfolio.
For FY21, the EPFO decided to liquidate its investment in equity, and the interest rate recommended is a result of the combined income from interest received from debt investment as well as income realised from equity investment, it said. This has enabled the EPFO to provide higher returns to its subscribers. There is no over-drawl on EPFO corpus due to this income distribution.
Experts say maintaining the return on EPF at 8.5 per cent is a very positive development in the current scenario. “Interest rates have been falling during the larger part of FY21, barring the few weeks after the Budget. The yield on the 10-year government bond had fallen to around 5.75 per cent level. In such an environment, to keep the interest rate of EPF unchanged is very much in the interest of long-term savers,” said Ankur Maheshwari, chief executive officer, Equirus Wealth Management.
Aarti Raote, partner at Deloitte India, said the EPFO announcement was welcome news
for all subscribers, considering that all other interest rates were falling.
Still a good bet
A comparison with other fixed-income instruments shows that EPF retains its attractiveness. On the fixed-income side, the most popular and accessible instrument is bank fixed deposits. But State Bank of India is currently paying only 5-5.4 per cent to non-senior citizens in the 1-10-year tenure.
“Corporate deposits from top tier (AAA) non-banking finance companies and housing finance companies will also not give you a return of 8.5 per cent today,” said Maheshwari. He added that debt mutual funds that hold AAA bonds in their portfolios currently have a yield that does not exceed 6 per cent.
Returns have come off on the small savings side. Public Provident Fund (PPF), which is completely tax exempt, today offers a return of 7.1 per cent. “PPF, however, has a limitation that you can invest only up to Rs 1.5 lakh in a year,” said Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. While small savings instruments available to specific demographic segments like senior citizens and parents of a girl child aged below 10 offer better rates than PPF, they are still not at par with EPF.
While long-term non-convertible bonds (NCD) like the recent one from IIFL did offer a return of 10.03 per cent, but it was rated AA, and hence cannot be compared to a sovereign-backed instrument.
Attractive despite Budget changes
Earlier, EPF was an entirely exempt-exempt-exempt (EEE) instrument. But in the Budget, contributions above Rs 2.5 lakh were made taxable at slab rate.
“This has made EPF/VPF (Voluntary Provident Fund) contributions above Rs 2.5 lakh slightly unattractive compared to pre-Budget times. But even post-tax, a return of 5.85 per cent for investors in the highest tax bracket remains attractive,” said Dhawan. He added that the tax-free limit of Rs 2.5 lakh imposed in the Budget will affect only a small set of subscribers—those who have a basic salary above Rs 1.75 lakh.
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