The government on March 31, 2020 announced a steep cut in interest rates on small savings schemes for the quarter ending June -- anywhere between 70 basis points and 140 basis points.

The Public Provident Fund (PPF), which is quite popular with a lot of savers because of both an attractive rate of interest as well as tax exemption, will now offer a rate of 7.1 percent, compared to 7.9 percent earlier. This is the lowest interest rate on PPF savings in more than four decades.

But don't despair. If you are a salaried employee, you can consider allocating a high percentage of your income to the Employee Provident Fund (EPF), which offers 8.5 percent at present. This is a good 1.4 percent higher than what the PPF offers.

What is common between EPF and PPF?

Both EPF and PPF are covered under Section 80C of the Income Tax Act, 1961. Both get tax exemption at the time of investment and also interest earned during the investment period and the maturity proceeds are exempted from tax

How does EPF work?

The employee contributes 12 percent of basic wages plus dearness allowance plus retaining allowance to the fund. An equal contribution is payable by the employer also. For example: If the monthly basic salary is 50,000, the employee contribution towards his or her EPF would be Rs 6000 a month ( 12 percent of basic pay) while an equal amount is contributed by the employer each month.

Can I contribute more than 12 percent of my basic towards EPF?

Yes, you can. Employees can voluntarily make a contribution above the statutory rate of 12 percent of basic pay . However, the employer does not have to match such voluntary contribution. So in the above example, the employer contribution will still be Rs 6000, no matter how much you contribute.

What is the maximum contribution you can make to EPF?

You can contribute a maximum of 100 percent of basic salary and dearness allowance. But there is a rider. If for some reason, you want to withdraw the money within the first five years of service, then the interest becomes taxable.

So does it make sense to contribute more to EPF rather than put money in PPF?

Definitely yes, if you are in the early stage of your career as you would be getting near 1.4 percent more than what you would have got in PPF. But you need to keep in mind, certain downsides as well.

What are those?

You cannot withdraw the funds in your EPF at any time of your choosing. The money can be withdrawn only after retirement. You can withdraw part of the money from your EPF, but only if there is an emergency. These could be towards medical expenses, house purchase or education. The limits on partial withdrawal is subject to the reason for the withdrawal. In the case of PPF, the lock-in is for 15 years.

BOTTOMLINE:

If you are looking a safe investment with a longer time horizon, you could increase your contribution to EPF.

First Published:Apr 1, 2020 1:30 PM IST