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| Capitalstars Investment Advisor |
Increasing your take-home pay is good news definitely, what with the prices of everything on the rise and your salary not picking up the pace at a similar rate. But then again, is it really good to get more money in hand now than later?
Who does not want more money to splurge. That is exactly what the government might just do for you. Although, it will be your own money landing in your pocket earlier.
Economic Times on Monday reported that the government is planning to give salaried employees the option of reducing the percentage one contributes to the Employees’ Provident Fund (EPF), which is currently pegged at 12 percent of the basic.
Quoting labor ministry officials, ET reported that this provision is part of the Social Security Code Bill, 2019, approved by the Cabinet and is expected to be tabled in Parliament this week. The Bill, however, retains employers’ PF contribution at 12 percent of Basic. Details on how low employees’ PF contribution can be brought down will be worked out after the passage of the Bill, officials said.
Will this be a good move?
This is not the first time we hear about government planning on lowering EPF contribution. Last year in August, too, there was talk about the same topic. Then in 2017, it was said that trustees of EPFO may approve a proposal to reduce the amount to 10 percent (employees’ contribution). Within a day, the Central Board of Trustees rejected the proposal.
Increasing your take-home pay is good news definitely, what with the prices of everything on the rise and your salary not picking up the pace at a similar rate. But then again, is it really good to get more money in hand now than later? After all the Employees’ Provident Fund (EPF) is a means to save for your retirement, a sort of forced savings.
The government rationale for allowing lower employee PF contribution might be that higher take-home pay may boost consumption, which has been falling, dragging growth down. However, financial planners say that this is just a short term solution that will have far-reaching implications for the employee.
It is never a good idea to put all your eggs in one basket – the same goes for EPF. It should not be the only investment avenue you use to save for retirement. However, for many in the Indian workforce, it is the only safe, tax-efficient financial product they use. And is an enforced discipline that helps curb any wasteful expenditure.
“For a lot of people, investment vehicles like the EPF and gratuity, are probably their only means for savings retirement. Reducing the EPF contribution of employees will mean that forced savings will be missed. Further, not many are financially literate enough to invest this money into appropriate financial products,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisors.
Surya Bhatia, managing partner of Asset Managers echoes this view. “I do not think this is a good move. The EPF is a safe, tax-efficient savings instrument. If you give someone the option to go for lower EPF contribution which leads to higher take-home pay, they will most probably opt for it. And with all the likelihood that money will be spent instead of being invested.
Should you opt for it?
The answer is no. And here’s why.
“It always advised that you do not withdraw your corpus even while changing jobs, instead we tell people they should transfer it. Also, even though there are options to withdraw the EPF corpus for instances like repaying a home loan or a daughter’s wedding, it is should be the last resort. In the case of opting for lowering EPF contribution, it should not be done.
Tax benefit of EPF
Your contribution towards PF qualifies for tax benefit section 80C of the Income-tax Act. If the proposals go through, lesser contributions will mean that much less of tax benefit. For example, if annual contribution towards PF falls by Rs 7,200, then for someone paying 31.2 percent tax (highest slab), then you will save nearly Rs 2,250 lesser tax.
Impact on your retirement corpus
EPF is a retirement-focused scheme and any reduction in the contributions made towards it by the employee will see a reduction in the overall corpus invested. Illustratively, for someone who is 30 years old and will retire at the age of 60, who is earning a basic salary of Rs 30,000 a month, if the contribution rate is reduced from 12 percent to 10 percent, the retirement corpus will fall from Rs 92 lakh to Rs 76 lakh by the time he retires.
Impact on your retirement corpus
EPF is a retirement-focused scheme and any reduction in the contributions made towards it by the employee will see a reduction in the overall corpus invested. Illustratively, for someone who is 30 years old and will retire at the age of 60, who is earning a basic salary of Rs 30,000 a month, if the contribution rate is reduced from 12 percent to 10 percent, the retirement corpus will fall from Rs 92 lakh to Rs 76 lakh by the time he retires.
Higher take-home pay is always good, the money can be put to good use. So, if you do opt for lower EPF contribution make sure you use it wisely. If you planning on investing it elsewhere, make you sure you do the required homework -- it should be aligned to your risk profile, investment horizon, and goals. Do not just chase returns or look at saving tax, since it is the fastest way to burn your money.