Why to switch from EPF to other Financial Products? - FinMapp

FinMappWhy to switch from EPF to other Financial Products?

Why to switch from EPF to other Financial Products?

Remember the times when your elders, especially parents, advised you to go for EPF when you start working, so that you have a corpus fund for retirement or if you want to invest that corpus to achieve some financial goal of yours.

The times have changed, and while EPF is quite an important aspect when it comes to salaried professionals, recent developments will make you think again.

The interest rate on employee provident fund deposits has been slashed to a four-decade low of 8.1 percent for the fiscal year 2021-22, down from 8.5 percent the previous year.

In 2020-21, the EPFO paid its members an interest rate of 8.5 percent, which was the same as the previous year. In 2018-19, the EPF rate was 8.65 percent, compared to 8.55 percent in 2017-18. The EPF interest rate was 8.65 percent in 2016-17.

The EPF rate reduction comes at a time when inflation is on the rise. In February, India’s retail inflation rate increased to an eight-month high, above the RBI’s safe zone of 6% for the second month in a row, while wholesale price inflation stayed in double digits for the eleventh month in a row.

The central board of trustees’ suggestion to decrease the interest rate to 8.1 percent will affect an estimated 64 million members of the Employees’ Provident Fund Organisations.

So what is EPF?

EPF is an acronym for Employees’ Provident Fund. It is a retirement benefits plan in which both the company and the employee contribute equally. This fund requires both of them to invest roughly 12% of their basic salary.

Both the employee and the company contribute to the Employees’ Provident Fund. The contribution is equal to 12% of the basic wage, plus any dearness allowance paid if applicable.

EPF receives a portion of an employer’s contribution, but not all of it. This fund receives roughly 3.67 percent of a company’s 12 percent contribution. This Employees’ Pension Scheme receives the remaining 8.33 percent.

When an employee retires, he or she receives a lump sum payment plus interest.

What is EPFO?

With a corpus of almost INR 16 trillion, the EPFO (Employees’ Provident Fund Organisation) is the country’s largest retirement fund and second-largest non–banking financial institution.

As of March 31, 2020, it had 247.7 million members having EPF accounts, with 143.6 million receiving Unique Account Numbers (UANs). Approximately 500,000 members are active contributors, with new contributions made to their EPF accounts in 2019–20.

Where to invest now?

Now that old and trustworthy EPF is not going to provide returns, the first question that pops up in your mind is: “Where do I invest and plan for my retirement fund/corpus?”

Here is a statistical comparison to help you make an informed decision!

NPS: (Serves as a retirement and investment product)

“Only instrument that comes with a tag of EEE, offering you the dual benefit of a higher return on investing and pension benefit after retirement”

The National Pension System (NPS) is a retirement benefits scheme established by the Government of India to provide all subscribers with a regular income after they retire. NPS is governed by the PFRDA (Pension Fund Regulatory and Development Authority).

The National Pension Scheme account can be opened by any Indian citizen between the ages of 18 and 60. The National Pension Scheme, which is regulated by PFRDA, matures at the age of 60 and can be extended up to 70 years. After three years of account opening, subscribers can take a partial withdrawal of up to 25% of their contribution for particular reasons such as acquiring property, funding a child’s education, or treating critical illnesses.

Returns on NPS

NPS offers its holders a general annualized returns of 8-10% or sometimes even 12%
Depending on the funds invested in.

As the funds are invested in market-linked assets, a national pension system does not have a fixed rate of interest. Instead, the returns are based on the market performance of the funds.

Through several pension funds, contributions to the NPS program can be invested in four different asset classes: equities, government bonds, corporate bonds, and alternative assets. These pension funds’ returns are determined by the performance of stocks and bonds on the stock and bond markets.

Tax Benefits

Under section 80C of the Income Tax Act, the National Pension System enables tax exemption on contributions paid to the system up to a maximum of Rs. 1.5 lakh. Furthermore, in the NPS plan, both the employer and employee contributions are eligible for tax exemption.


This is a donation to the U/S 80 self-contribution. This section allows you to claim a maximum deduction of up to 10% of your salary as a tax exemption. This restriction applies to self-employed taxpayers and is set at 20% of gross income.


The contribution made by employers to the NPS plan is covered in this section. Self-employed taxpayers are not eligible for this benefit. The lowest of the following amounts is the maximum tax exemption amount:

-Employer’s actual NPS contribution

-10% of the basic salary + Dearness Allowance-Total gross income

You can claim any excess self-contribution (up to Rs 50,000) as a National Pension Scheme (NPS) tax advantage under section 80CCD(1B).

Tax Saving Fund/ELSS

Tax Saving Mutual Funds or ELSS (Equity Linked Saving Schemes) are equity funds that are diversified. These funds invest most of their corpus in equity or equity-related products. It is a great way to save income tax under Section 80C of the IT Act.


A tax saving fund provides you with a return of 8-10% or more, depending on the type of funds invested in.

You should be aware that ELSS funds do not offer guaranteed returns because their success is entirely contingent on the performance of the underlying securities. Having a longer investment horizon than 5 years, on the other hand, can yield better returns than any other tax-saving investing strategy.

Tax Benefits

It is one of the best tax saving/investment options around, which offers INR 1,50,000 a year under Section 80C of the IT Act. This helps you save up to INR 46,800 a year in taxes. Any amount you earn from your investments above INR 1 lacs is taxed as Long Term Capital Gain (LTCG) at a rate of 10% at maturity.

💡Bottom of the line:

The EPF rate reduction comes at a time when inflation is on the rise. In February, India’s retail inflation rate increased to an eight-month high, above the RBI’s safe zone of 6% for the second month in a row, while wholesale price inflation stayed in double digits for the eleventh month in a row.

Now that EPFs won’t provide returns as expected, it’s time to shift your focus to other financial and tax-saving instruments which will provide a better return seamlessly.

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