Financial Year (FY) 2015-16 which will end in next 1 ½ months, is unlikely to be an exciting one for investors. While equity markets haven’t generated exciting returns so far, fixed deposit rates have been coming down and are expected to go further down. There’s been a lull in the real estate markets across top cities and returns generated by gold haven’t been extraordinary either.

In such an environment, over 5 crore Indians are going to get a reason to smile. Their investment in Employee’s Provident Fund (EPF) is likely to fetch them higher returns this fiscal than what they earned every year for last 4 years.
 

Expect A Hike This Year…

(Source: EPF India, PersonalFN Research)  

Employees Provident Fund Organisation (EPFO) has a proposal of retaining the last year’s (2014-15) interest rate even this year (FY 2015-16). Nonetheless it is planning to pay a bonus of Rs 200 across the board without making any distinction among subscribers.

On the other hand, labour unions backed by various political parties and other politically motivated outfits have been demanding 9.0% interest rate. General Secretary of Bharatiya Mazdoor Sangh (BMS)—a Rashtriya Swayamsevak Sangh (RSS) supported union told media that, “We will demand 9 per cent rate of interest for the current fiscal for Employees' Provident Fund Organisation (EPFO) subscribers. There is no provision of providing bonus in the scheme. We will oppose any such proposal. “

However, EPFO’s own estimates formed in September 2015 brought out that the payment of 9.0% interest would result in a shortfall of Rs 100 crore. Based on disclosures in the parliament in August 2015, Business Line had reported that, corpus under the management of EPFO was Rs 3.6 lakh crore (pension component is excluded for the calculation).

As per the conservative estimates of BMS, EPFO is likely to earn in excess of Rs 34,800 crore in FY 2015-16. If it pays interest at the rate of 9.0% to all its subscribers there would still be a surplus of around Rs 100 crore with the EPFO.

The General Secretary of the congress backed union opined that interest of 9.0% should be paid, if feasible. He pointed out that the EPFO pays interest from its own earnings and takes no financial assistance from the Government.

EPF to become more attractive than Small Savings Schemes
Recently the Government announced that it will lower the interest rate on Small Savings Schemes (SSS) such as Public Provident Fund (PPF) Kisan Vikas Patra (KVP) and National Savings Certificates (NSC) to name a few. As you may be aware, RBI has lowered policy rates by 125bps (1.25%) since January 2015. Despite of that, lending rates haven’t cooled off. Banks often give an excuse that, their borrowing cost remains high as SSS pay higher interest rate; making bank deposits less attractive. To provide level playing field to banks and help borrowers with lower borrowing cost, the Government has decided to review interest rates on SSS quarterly starting from April 01, 2016.

On this background, it was expected that, the interest rate on EPFO may come under pressure too. But, now it seems that, trade unions are likely to nudge for 9.0% rate. That apart, now EPF can invest up to 5% of its corpus in equity markets, which may help accelerate returns in the long run.

In straight comparison EPF may outscore PPF as the interest rate on PPF is likely to be more market linked and transparent. EPFO may not have that flexibility as long as it can afford to pay higher interest.

Think beyond EPF for your retirement planning
PersonalFN believes, if you are a salaried person and have been contributing to EPF; you shouldn’t underestimate the role of it in your retirement planning. You might be disinterested in contributing to it considering lower contribution limits. Nonetheless, power of compounding works as a magical wand by the time you retire. That being said, you shouldn’t solely depend on EPF either for your retirement planning.

A comprehensive financial plan takes care of important goals such as retirement. Right mix of assets and disciplined investment approach help you build your retirement savings. The Retirement Letter, a PersonalFN initiative, offers its subscribers valuable guidance on managing money for their retirement.

 

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