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NEW DELHI :
If you are depending on their employees provident fund (EPF) account for retirement needs, income of this year is likely to disappoint you. Despite the new measures such as allowing Covid pandemic of the withdrawal of the facilities and a cut in the contribution RATE to improve liquidity in the hands of the PF account holders during the course of the crisis, however, returns for this exercise will be affected. Despite the drop of interest rates in fixed deposits and small savings schemes, the Employees Provident Fund Organization (epfo) had declared an interest rate of 8.5% for 2019-20.
1) Cut in the EPF contribution for 3 months
The government has announced a reduction in the scheme contribution RATE requirement of 24% of the basic salary and dearness allowance (12% employee and 12% employer) of 20% for the next three months. As a result, your hand salary will increase.
However, a lower contribution will lead to a lower retirement corpus as epfo relies heavily on compounding to create a nest egg that can help people to manage their living costs after retirement.
“The interest is credited to the member’s account in the monthly balances. Since there will be less contribution for 3 months, the monthly balance will be lower than measured and will lead to the decrease of the interest credit,” Saraswathi Kasturirangan, Member of Deloitte India, said.
2) the Penalty for the delay in the RATE of deposits withdrawn
Taking into account the lack of normality of the functions and of a liquidity crisis, epfo has removed the penalty for delay in the RATE of the deposits by employers. The penalty ensured that the contributions that are deposited in the time, making it easier for the epfo to manage the investments made on behalf of the fund, to Harsh Jain, co-founder and operations director of online investment platform Groww, he said.
The delay in the payment of contributions by employers impacts on monthly balances, and this in turn will have an adverse impact on the interest earned on deposits. The benefit of the capitalization of interest on the balance not be available in the contributions are not credited in time, Kasturirangan said.
“The range of impact will be clear once we know how many employers have elected to deposit the contribution after three months,” Jain said.
3) epfo interest rate is likely to fall even more this year
Given the fall in the interest rate scenario in India, now in the Reserve Bank of India (RBI) has been the reduction of the indexes of regularity, that it would be difficult for the epfo to maintain 8.5% of the rate of interest for the present exercise also. Public Provident Fund (PPF) rate of interest has fallen to 7.1%, while the rate of interest on National Savings Certificate (NSC) has been reduced by 110 bps to 6.8%.
Given the fact that the rate of return of the investment has been decreasing, the companies with PF Trusts should review whether any proceeds are sufficient to match the interest rates that the epfo declares. “We’ll also have to wait and see if a lower rate of interest shall be declared by the epfo for the FISCAL year 2020-21,” Kasturirangan said.
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