The new provident fund (PF) interest price guidelines that bring tax into the image has produced investors take a fresh look at the provident fund as an investment selection. A comparison in between EPF, PPF, and bank fixed deposits will show which of these investments is nonetheless a superior selection for you. All this simply because the new PF rule introduced lately could act as a dampener for some workers. If the total contribution towards the PF account exceeds Rs 2.5 lakh in a year, the interest earned on the excess quantity will not be tax-exempt any longer. The interest earned on excess PF contribution will be taxed as bank FD.“Interest earned by the Employee Provident Fund from contributions above Rs 2.5 lakh a year will be added to the taxable income and taxed at the normal rates. This will only apply to the employee’s contribution and not that of the employer,” says Rajesh Bansal, MD, Midas FinServe, a economic services firm.
Many workers are contributing more than the statutory limit of 12 per cent of the simple spend towards their provident fund account. The guidelines permit an employee to contribute a greater percentage, nonetheless, the employer may perhaps not necessarily match the employee contribution. So, even when an employee contributes a greater quantity towards PF, the employer may perhaps stick at 12 per cent of the simple salary.
The purpose why quite a few workers opt to invest in VPF is that it supplies the highest tax-absolutely free return on PF balance, backed by a sovereign assure. For 2019-20, the PF interest price for 2020-21 has been retained at 8.5 per cent as the prior year.
Other options inside the debt asset class could be Public Provident Fund (PPF), NSC, KVP, bank deposits or debt funds. The maximum quantity that one can invest in PPF delivering 7.1 per cent is Rs 1.5 lakh which for most such workers would have been exhausted. Bank deposits are presently supplying interest price of about 6.5 per cent and interest is taxable. For most of these workers, it may well make sense to continue earning 8.5 per cent in PF as they are safest even even though taxable for them. The post-tax return will be about 5.5 to 5.85 per cent for these paying tax in the highest revenue slab.
A word of caution! You can quit VPF contributions mid-way by intimating your employer but the income gets locked in till retirement. Other debt investments such as bank FD nonetheless supplies liquidity to you.
Tax on PF interest revenue may perhaps make some workers take into account exploring other possibilities as effectively. For these who are contributing up to Rs 20,835 a month towards PF are not impacted and may perhaps continue but other people may perhaps also take into account marketplace-linked investments. One may perhaps also take into account investing in NPS preferably in the equity fund selection to save for their retirement. On retirement, only 60 per cent can be withdrawn as tax-absolutely free corpus when on balance compulsory annuity is to be received for a lifetime.
In addition to debt investments such as bank FD, PPF, an employee contributing greater than Rs 2.5 lakh a year may perhaps take into account marketplace-linked solutions specifically significantly less volatile liquid and debt funds. “Mutual funds offer a plethora of options and the investors can choose the best option based on their own financial needs and risk appetite. For starters, mutual funds have a wide array of equity, hybrid and multi-cap funds. Investors can also look at international investing with underlying exposure to international markets and commodities. In addition, there are also the dynamic equity funds and balanced advantage funds that have filled the gap between stability and risk-oriented products,” says Santosh Joseph, Founder and CEO, Germinate Investor Services LLP.