EPFO interest rates: A look at how it stacks up against other schemes

Retirement fund body Employees’ Provident Fund Organisation’s (EPFO) on March 4 decided to retain 8.5% annual rate of interest on provident fund deposits for the current financial year for its more than five crore active subscribers.

The interest rate decision, even though the lowest since 2012-13, came as a relief for many as there were talks of a rate reduction.

Adhil Shetty, CEO, BankBazaar said, “It will come as a relief to millions of Indians that the EPF rates have been retained. EPF is the first and default retirement planning for a significant number of people joining the workforce. It’s a highly secure tax-saving instrument that provides returns at 8.5% per annum, which is the highest return among all similar government-backed instruments. Provided the annual investment is less than Rs 2.5 lakh, the interest earned as well as the maturity amounts are also tax-exempt, making the returns from EPF are more or less real returns after tax. Moreover, it is something that all salaried people working in an organization with at least 20 people are mandated to invest in. So it’s importance as a key investment tool cannot be underplayed”.

“However, while the EPF can be a strong contributor, it alone is not sufficient to build a corpus. For example, if you have an annual contribution of Rs 20,000 per month to EPF, you will need roughly 25 years to build a corpus of Rs 2 crore. An equity investment of Rs 20,000 per month that gives a CAGR of 12%, on the other hand, will take you only 20 years to build up the same corpus. So, while EPF should be a strong pillar of your retirement planning, it shouldn’t be the only one,” Shetty added.

In comparison to other fixed-income instruments, EPF is the most attractive bet. The other is bank fixed deposits.
Here is a look at other savings instruments and the interest rates offered by them. Sukanya Samriddhi Yojana offers 7.6%, Senior Citizen Savings Scheme (7.4%), Pradhan Mantri Vaya Vandana Yojna (7.4%), Public Provident Fund (7.1%).

The other is equity-linked savings schemes (ELSS). The category generated annualized average returns of around 9%, 16%, and 13% per annum over the last three-year, five-year, and 10-year periods, respectively.

Talking about investment portfolios, Harsh Roongta, founder of Fee Only Investment Advisers said,” First of all, there can’t be a standard recommendation. A person who is 30 years old, who has no dependents, is only investing for his retirement. It will be completely different from the requirement of a 45-year-old with two children, a home loan or a 55-year-old who is going to retire. No instrument is in itself good or bad. It totally depends on your need”.