The proposed EPF rules could now reduce your take-home salary
Salaried earners often boast of several allowances conferred upon them by the virtue of their employment. But soon these allowances could upset millions of household budgets. How? Well, recently, the Employees Provident Fund Organisation(EPFO) released a circular which stated that certain allowances must be added to the salary, while computing EPF Contribution. Thus as an effect of this, higher amount would be deducted as employees contribution to the PF account, which will leave many salaried earners with a lower net take home pay.
At present employees contribute 12% of their salary (which include Basic Salary and Dearness Allowance), while employers too contribute a matching amount. But going forward if the revised rules are implemented, the other allowances too would be included for calculation purpose. Last year, the Madras High Court and the Madhya Pradesh High Court held that the various allowances paid to employees should also be considered while computing the PF contribution. But this issue is now pending before the honourable Supreme Court. Moreover, employers may not want to absorb this rise in wage bill, and thus may rejig the compensation structure to reduce down their liability.
On the flip side while this could upset household budgets of several salaried earners, adding allowance for PF contribution purpose, would also result in greater amount (than at present) being assigned for retirement planning. With life expectancy has increased with better healthcare facility available today, this protects the interest of employees as it enforces higher savings.
We are of the view that for salaried earners, contributions to the EPF offer a lot of benefits - it offers you safe returns, being one of the safest debt instruments available in India. It benefits from a good tax status, being E-E-E, or exempt-exempt-exempt. And it offers the equivalent of a high pre-tax rate of guaranteed interest - earning 8.60% tax free (which equivalent of a 12.28% interest rate considering someone in the 30% tax bracket). However keep in mind, that this is a very long-term instrument; and so if you have short term financial goals, don't try to fund it by withdrawals from your EPF. If your goals are in fact primarily short term, as is the case with young couples, or parents funding their children's educations in a few years; you might want to consider only investing the minimum amount in your EPF, and channelizing your remaining funds towards a more liquid instrument, keeping your risk appetite and goal time horizon in mind.
It is noteworthy that it is imperative for one to resort to comprehensive retirement planning, by investing in various asset classes with due to consideration to their age and risk appetite, amongst host of important factors which are go into planning for life goals. To keep your financial health in pink, it is imperative to curtail unnecessary expenses and deploy your hard earned money in productive asset classes.
Best Regards
Prakash Nair
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