The Modi government is mulling to allow Provident Fund or PF account holders to decide their monthly PF deduction by tweaking the Employees Provident Fund Organisation (EPFO) norms.
While the PF and EPF account holders are hailing the Modi government’s proposal to allow employees to decide their PF contribution, tax and investment experts have a warning for them. According to them, PF contribution is related to one’s retirement fund and if employees decide to decrease their provident fund contribution, their retirement fund will also get affected by it — it will get reduced.
Apart from this, experts were of the opinion that higher salary leads to income tax outgo while having higher EPF contribution leads to income tax exemption on EPF contribution up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act 1961.
They have advised EPFO subscribers to avoid decreasing the PF contribution they said that one should try investing beyond PF deduction limit of 12 per cent as it gives 8.65 per cent fixed and risk-free returns, which is more than the debt mutual funds, public provident fund or PPF, bank fixed deposits and other debt funds.
Speaking on the change in EPFO rules Manikaran Singhal, a SEBI registered tax and investment expert said, “One must know that one’s EPF or PF is a long-term investment that is largely considered a retirement-oriented mandatory investment. By decreasing the EPF or PF contribution, one is putting one’s retirement fund in a compromised position. Apart from that, by decreasing one’s monthly PF contribution, he or she is getting more take-home salary means more chances of Income Tax outgo. In that case, decreasing EPF balance or PF contribution and then investing in income tax saving plans is not a wise option because any of the income tax saving investment won’t fetch such a whopping 8.65 per cent returns.”
Standing in sync with Manikaran Singhal’s view Kartik Jhaveri, Director, Transcend Consultants said, “In long-term investment, especially in debt funds, long-term investments give compounding benefits to the investor means the interest on interest. In such a case, decreasing one’s monthly EPF or PF contribution is not a wise decision because lesser PF contribution will have a large impact on the EPF balance or PF maturity.”
He said that if someone is decreasing one’s ELF contribution then he or she should invest that in ELSS mutual funds because any of the equity funds is expected to give at least 12 per cent return in the long-term horizon.