EPF rates likely to go down, should VPF investors look for alternatives?

With large withdrawals and fewer contributions being made amid the coronavirus pandemic, the Employees’ Provident Fund (EPF) rates are likely to go down, experts suggest. Speculation is rife that Employees' Provident Fund Organisation (EPFO) -- the retirement fund body -- may cut interest on EPF for this fiscal (2020-21), from the current 8.5 percent.

This is expected to have a cascading effect on the returns from EPF and Voluntary Provident Fund (VPF), believes Abhinav Angirish, founder of Investonline.in.

VPF is an extension of EPF and investors can opt for VPF only if they have an EPF account.


Additionally, Budget 2021 levied a tax on interest income above Rs 2.5 lakh in the case of EPF. This would further add to the woes of subscribers as interest earned on the annual EPF above Rs 2.5 lakh will be taxable.

According to Angirish, VPF investors will have to assess their risk appetite and look for alternatives. Conservative investors, Angirish suggests, can park their money in Public Provident Fund (PPF) if they have not exhausted the limit of Rs 1.5 lakh.

"For those who are in the highest tax bracket, the post-tax returns work out to around 5.98 percent. However, one must note that the present interest rate of 8.5 percent in EPF is not guaranteed. It is reviewed by the EPFO central board of trustees (CBT) every year," he explains.

If investors can digest volatility, Angirish says, they should consider investing in mutual funds. "Equity mutual funds are ideal for building a retirement fund. Mutual funds are also tax-efficient since only 10 percent of capital gains are levied on long-term investments. Investors who are in their 30s can start investing in equity mutual funds. Even if they are in their fifties, they can still invest in debt mutual funds to generate higher returns," he advises.

Before investing in mutual funds it is, however, recommended that investors should seek the advice of financial planners.

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