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Recalculate your financial plan after EPFO clarification

Recalculate your financial plan after EPFO clarification

You shouldn’t be forced to invest more than the statutory limit of Rs6,500 per month into EPF, says the EPFO. This leaves you with additional income which can be used in multiple ways.

Have you been looking at that little headroom to invest more for the retirement kitty or to build an emergency fund? A recent clarification from the Employees Provident Fund Organisation (EPFO) brings some respite.

The EPFO says: “Do not force employers to contribute over and above the statutory wage ceiling limit (Rs6,500 per month). However, an option is available to employees to contribute beyond the statutory wage ceiling, if they so desire.”

The Employees’ Provident Fund Organisation (EPFO) has stated that the employers and employees shouldn’t be forced to invest more than 12% on the statutory limit of Rs6,500 per month into EPF.

For example, if you earn a basic salary of Rs25,000 a month, your PF contribution would work out to Rs3,000 (12% deducted by the employer). With the new system, the minimum you will have to contribute will be 12% of Rs6,500, which works out to just Rs780 per month. On the same salary mentioned above, this would leave you with an additional Rs2,220 every month.

With this annual sum of Rs26,640, you can opt for the following financial measures:

1. Reduce your liabilities – increase home loan (or other loans’) equated monthly instalments. You can even pre-pay loans at the end of the financial year.

2. Pay off your credit card bills – stop rolling over credit card bills and pay them off. You’ll be paying less in the long run.

3. Invest elsewhere – instead of investing Rs5,500 each month into EPF that would earn 8.75% returns, you could opt for income funds which have been offering 9.25-9.82%, tax efficient returns.

4. Consider – investing money in equity mutual funds via a systematic investment plan (SIP)

5. Remember – it wouldn’t be wise to invest in FDs that offer just 0.25% more than the EPF, as the tax liability would bring down the effective interest earned.

Equity markets have the potential for earning you a higher return in the long run. Large cap oriented funds have delivered returns of 18.55% over the last five years and 29% over the past year. Instead of buying products on EMIs, you can save the interest amount by purchasing through these additional funds.

If you are a job hopper – someone who spends less than five years at a firm – then investing the money outside the EPF scheme would help you save on taxes for early withdrawal. However, if you had been banking on the EPF deduction for your tax planning purposes, you will need to make alternative arrangements.

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