Changes made in 2020
Under the Atmanirbhar Bharat package, the statutory rate of EPF contribution of both employee and the employer has been reduced to 10 percent of basic wages and dearness allowances from the existing 12 percent for all classes of establishments.
EPFO’s central board of trustees announced an 8.5 percent interest rate for the financial year 2019-20 March, the interest credit came under action from Dec 2020. During the lockdown period, the Finance Minister made several announcements on allowing partial withdrawals and reducing the statutory EPF contribution rate from 12 percent to 10 percent. Statutory rate reduction in the month’s May, June, July was for having more cash in the hands of employees who are in a money crunch. Also, to reduce financial strain, during April, May, and June, EPF subscribers were allowed to withdraw up to 75 percent of their EPF corpus or three months’ salary whichever is lesser.
Keep the account untouched until retirement
According to the recent changes made in the EPF withdrawal rule, partial withdrawal from EPF is now allowed for a child’s wedding purpose, higher education of child or self, or for making down payment for the house, etc. Subscribers are also allowed to withdraw the entire amount if they remain unemployed for more than two months.
Even if to an extent the allowance can be a relief in a time of crisis, experts say it is not recommended to touch the money until retirement. The core of the EPF is when we let the compounding works. If we allow the incremental contributions every year, can help accumulate tremendous benefits in the long run. If we touch the amount in the accumulation phase it reduces compounding benefits over the years.
A recent study shows, the government is planning to give employees the flexibility to reduce the PF contribution to 10 percent, presently at 12 percent. It will definitely enhance the take-home pay, but that move will compromise your retirement savings. Financial experts are veritably against this new move.
Consider an example, a 30-year-old getting a basic salary of 30,000 per month. If the contribution to EPF is reduced from 12 percent to 10 percent, the retirement corpus will reduce from Rs 92 lakh to Rs 76 lakh by the retirement period. When the EPF contribution is less, the tax liability will also be reduced.