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Know how the cut in EPF rate will affect your retirement planning?

EPF Rate Cut Impact: The Employees’ Provident Fund Organization (EPFO) on March 12, 2022 decided to reduce the interest rates on EPF deposits from 8.5 per cent to the lowest in four decades to 8.1 per cent for the financial year 2021-22. Earlier in 1977-78, 8% interest rate was given to EPF account holders. This was the worst news for 6.7 crore EPF account holders who used to consider investing in EPF as their retirement planning. He was troubled by the ever-increasing inflation. The rest were troubled by the declining interest rate in investment instruments.

Government defended the decision
This decision was taken in a meeting chaired by the EPFO ​​Board, headed by Union Labor Minister Bhupendra Yadav. He defended this decision saying that despite this deduction, account holders get more interest on investment in EPF than all other investments. He said that only 5.4 percent interest is available on SBI’s 10-year FD. Finance Minister Nirmala Sitharaman had similarly defended the decision to cut interest rate on EPF.

What is the effect on EPF account holders?
Employed people who invest in EPF assume that the funds deposited in EPF will be useful for them after their bad times, funding higher education of children, daughter’s marriage, buying a house and retirement. But reducing the interest rates on EPF means getting less interest annually on the money deposited in the fund. And if someone retires after completing 60 years of age, then when he gets the funds deposited in EPF, then it will be less than expected. Let us tell you that in the 90s, from 1989-90 to 1999-2000, 12 percent interest was paid on EPF annually. But after 1999, EPF account holders never got more than 10 percent interest on EPF. Since 2001, less than 9.50 percent interest has been received.

How much will it take to dent the retirement corpus?
The reduction in interest rates on EPF can have an impact on the retirement planning of the account holders. For example a 30 year old person whose basic salary is Rs 30,000. If his salary increases by 5 per cent every year and if he gets 8.5% interest on EPF, then on attaining the age of 60 years, the total fund deposited in his EPF account would have been Rs 1.40 crore. But after cutting the interest rates on EPF, he will get only Rs 1.30 crore at the rate of 8.1 percent interest. That is, due to the reduction in the interest rate on EPF, there will be a decrease of 7.14 percent in its total fund.

If you look at the second example, then suppose the basic salary of a person is Rs 50,000 a month. And Rs 20 lakh is deposited in his EPF fund. If he had got 8.5 interest, then his total fund would have been Rs 25.67 lakh after 2021-22. But due to the cut in interest rates, his total fund will be Rs 25.48 lakh. That is, a loss of Rs 19,000.

If we take the third example, suppose an employee has a deposit of Rs 20 lakh in his EPF account. The one who would have got 8.5 percent interest on EPF in 2021-22, would have got Rs 1.70 lakh as interest i.e. the total EPF fund would have increased to Rs 21.70 lakh. But now that the EPF rate has been reduced to 8.1 percent, then only Rs 1.62 lakh will be available as interest. That is, the total corpus will be Rs 21.62 lakh. Due to the reduction in EPF rate, the account holder will suffer a loss of Rs 8,000.

Rules for Contribution to EPF
Let us tell you that in companies with more than 20 employees, it is mandatory for employees earning up to Rs 15,000 per month to open an EPF account. 12% of Basic Pay and Dearness Allowance is deducted as employee’s contribution and another 12% is deposited by the employer. In which 8.33 percent is deposited in the Employees’ Pension Scheme 1995.

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