As a pre-election sop and in almost 4 years' time, the provident fund for the first time has recommended an increase in EPF return to 8.65% for the financial year 2018-19 as against the earlier 8.55% return being offered.
The decision to hike the rate of return comes at a time of falling interest rates and the decision has to be endorsed by the finance ministry. Furthermore, a higher interest rate offering by such funds may limit banks to bring deposit rates down and pass on the rate transmission effected in the February monetary policy review meet.
Here's now stressed as to how 8.65% on EPF is actually equal to 13.5% return
On the EPF, the returns are tax free which otherwise are part of returns on FDs and other debt instruments. So, overall the interest or return for the EPF subscriber will go higher than in the case of what you would have made on bank deposits.
Say, if you fetched 13.5% return from some taxable source and fall in the highest income tax slab with income in the range of over Rs. 1 crore in a year, you would have to shell out 35.88% as taxes, cess and surcharges and so your net earnings from that source will be equivalent to just 8.65%. This is precisely what you are getting from EPF that though is a tax-free source for you as an employed concern.
And when talking about the lower income slab i.e. between Rs. 50 lakh to Rs. 1 crore, the EPF earning of 8.65% is as good of 13.17% return on FD, given the taxation aspect on FDs.