Get rich tip! Should you double your EPF contribution or do this instead? Find out now
A timely increase in the PF contribution can help you have double the PF amount at the time of retirement. This is surely, a great benefit, but there is more to this story than just that.
Every salaried professional is aware that a certain amount from their salary is deposited into their Employees' Provident Fund every month. However, very few people know that they can double their PF amount by making a very small sacrifice. Many employers provide a flexi tool to their employees to help them restructure their salary. With this tool, an employee can ask the employer to increase her or his PF contribution. This may make your in-hand salary slightly less but that should not be looked at as a problem. Increased PF contribution will help to increase your savings as well as in saving income tax. Also, after every appraisal cycle, your pay in hand will increase and that will address this issue too.
If any employee doubles his monthly contribution making it 24% of basic from the default setting of 12%, then the amount in his PF fund will itself double. A timely increase in the PF contribution can help you have double the PF amount at the time of retirement. This is surely, a great benefit, but there is more to this story than just that.
At present, the Employee Provident Fund (EPF) offers 8.55% interest rate on deposits. While that is the best interest rate to be found in such schemes, there are problems with that.
According to AK Shukla, former assistant commissioner of the Employees' Provident Fund Organization, the EPFO rules allow an employee to increase their PF contribution. According to the rules, 12 percent of basic salary and DA is deducted from employee's salary towards PF contribution. A similar amount is deposited in the employee's account as the company's contribution.
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The Contrarian Viewpoint!
While this is a great way to increase your retirement money by doubling your PF contribution, some experts say there is an even better way to make more money. The difference is that you will have to invest somewhere else. Hemant Rustagi, CEO, Wiseinvest Advisors, told Zee Business Online that while an investment in PF gives assured safe return, it doesn't help the investor in beating inflation over the long-term.
"Many people opt for PF as it gives assured returns and helps one prepare a retirement corpus as this is a long term investment. Contribution of 12% of basic salary is mandatory for PF. However, more money you put in it, the more you will have to compromise in the future. Let's say EPFO gives you an average return of 8 per cent and the long-term inflation remains around 7 per cent. This money you are putting regularly in PF for a period of 20 years. If you put the same money into a balanced mutual fund or an equity mutual fund, the return could be almost double over the said period," suggested Rustagi!
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Rustagi further said that though equity is risky, the bigger risk is inflation. He said that while a regular mandatory contribution in PF provides you safety, you should invest the additional amount in those instruments which help you beat inflation and give a better return.
"We are much concerned about our hard-earned money and therefore prefer to invest mostly in conservative funds like PF. Equity is risky but the bigger risk is of inflation which is invisible. You may invest in PF and get a return of around 8 per cent but you have the opportunity to invest in equity. If you invest in SIPs every month just like you do in PF, your returns could be much higher than 8% in the long-term. Another thing one should keep in mind that no one knows how much money you need at the time of retirement. Thus your effort should be to beat the inflation and earn more than it," he said.
Also, these options give you flexibility and option to switch to other funds if one option is not performing well, concluded Rustagi.