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EPF, VPF Turn Less Attractive For 2 Reasons: Here Are Better Options
EPF and VPF shall now lose its sheen on two concerns now.
1. There shall be announced a lower rate for EPF investment for the fiscal year 2020-21 and as per reports it is due to be announced on March 4, 2021.
2. Also, in the Budget 2021, to curb its fiscal slippage concerns, the government will cap the interest exemption on contribution towards EPF by the EPF member beyond Rs. 2.5 lakh per year. As per experts, the move shall primarily weigh on high income earners, who even diverted their excess cash to this instrument or even opted for VPF or Voluntary Provident Fund to get a higher return that is indeed tax free.
But the Budget 2021 move will now curb channelisation of the excess kitty of these high net worth individuals to other instruments.
For those making contribution towards EPF or VPF over Rs. 2.5%, subscriber will get post tax return of just 5.8% considering 30% tax bracket.
Interest rate for EPF
For the FY 2019-20, EPF interest rate stood at 8.5%, but this shall be brought down considering higher withdrawals and lower contribution by subscribers.
So, alternative investments to EPF and VPF considering interest rate on EPF shall trend lower and EPF and VPF attract same taxation
1. Debt funds:
While credit risk was a concern that curbed investment in the space, nonetheless, wealthy investors will remain with limited choice and would need to explore this option for higher return as we well as taxation benefit.
Long-term capital gains for debt funds for a holding period of three years and above are taxed at 20 per cent with indexation.
Return from debt funds will be in the range of 7-7.5% in the near term as the rates are likely to go down.
2. NPS:
This is a better long term investment for aggregating a good enough corpus and can provide return of up to 16 percent depending upon the fund invested into.
Tax benefits
Under 80 C - Upto Rs. 1.5 lakh
Under Section 80CCD(1B)- Additional Rs. 50000
60% upon maturity is tax free, while the remaining corpus taken as annuity is taxable.
3. Equity mutual funds:
They also enable creation of healthy retirement fund corpus and are tax efficient as only gains of over Rs. 1 lakh in a year attract long term capital gains at the rate of 10 percent.
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