Thread by @kirtan0810

In such a low interest rate scenario, what if I tell you, there is a product, which pays 8.5%, tax free, default risk free & also gives you deduction under 80C, would you invest?

Follow this thread on EPF v/s VPF

Hit the ‘re-tweet’ and help us educate more investors (1/n)

In the western world, 1s u retire, ur medical, pension etc. is borne by the government. This is 1 lagging bit in India 4 various reasons where we don’t have social security schemes. To counter this, government runs schemes like NPS, EPF etc. (2/n)

We have written about NPS before & hence will not talk about it here; u can read our thread on the same. In this thread, we will focus on educating u on Employee Provident Fund & Voluntary Provident Fund & y u can allocate some investments here (3/n)

https://twitter.com/kirtan0810/status/1331428570636247042?s=20

As an individual investor, most of us want 3 basic things,
(1) Create wealth
(2) Have an insurance cover and
(3) If possible, receive pension.

It may surely not be adequate, but all the 3 requirements are taken care off by investing in EPF. let me explain how. (4/n)

(Q1) Which organization offers the EPF?
Private organization with 20 or more employees will compulsorily have to register with Employee Provident Fund Organization (EPFO) & provide employees with the EPF benefits. Less than 20 employee organizations can do it voluntarily. (5/n)

(Q2) Is EPF compulsory 4 all employees of an organization with 20+ employees? No

Ur salary may have many components like HRA, medical etc. Employees with a Basic+DA salary of 15K & below r compulsorily covered in the EPF scheme. Others can voluntarily join the scheme. (6/n)

(Q3) How does the EPF scheme work?

12% of your Basic + DA is deducted every month and the same amount is contributed by the employer to the employees EPF account over and above the salary. (7/n)

For Ex – Employee salary 20,000, of which Basic + DA is 15,000.

Employee contributes to EPF account: 15,000 * 12% = 1800

Employer contributes another 1,800, over the above the salary in the employees EPF account. (8/n)

Which means, 1st month, employee receives 18,200 as salary (20,000 – 1800) and its EPF account will have 3600 accumulated corpus (1800 by employee & 1800 by employer) (9/n)

(Q4) The entire 24% or 3600 goes to EPF?
When you register for EPF, you automatically also register for Employee Deposit Linked Insurance (EDLI) & Employee Pension Scheme (EPS)

So,
EPF – Helps in wealth creation
EDLI – Gives term insurance
NPS – Prepares for pension (10/n)

(Q) How much of the 24% goes where?

(a) Employees full 12% goes to EPF
(b) Employers – 8.33% goes to EPS (max ₹ 1250), 3.67% goes to EPF
(c) Government – 1.16% to EPS if employers contribution is less than 1250 (11/n)

(Q) How does the EPF work?
a. So if ur salary is 20K & Basic+DA is 15K,
15,000*15.67%=2350.5 is accumulated in EPF/month
b. Ur contribution – 15,000*12%=1800 is tax deductible under 80C
c.Interest u earn on entire 2350.5 is tax-free
(d)Withdrawal proceeds are tax-free after 5yrs

(Q) How much return do I get in my EPF account?

This number keeps changing as decided by the EPFO year on year. For the year gone by (FY – 19-20), 8.5% of interest has been announced and soon it will be credited in the account. Attached is the history of EFP rates (13/n)

(Q) How much will this amount look like @ retirement?

Cant give u an accurate answer but assuming the average EPF rate over the next 40 years till u retire will be 5%, u can accumulate roughly 55 lakhs in ur EPF account by contributing 8.64 lakhs (1800*480) over 40 years (14/n)

(Q) If the rate is 8.5%, can I contribute more 2 the EPF scheme?

Yes. U can contribute upto 100% of ur Basic+DA & get
(a) tax deduction upto 1.5 lakhs
(b) earn tax free returns of 8.5% &
(c) also get tax free maturity.

We call these additional investments as the VPF (15/n)

Business owners/HNIs attention please,
U have ur own company, u can design ur own salary structure, & it can have 100% of the salary as Basic+DA. U can start buying these tax-free bonds yielding 8.5% by adjusting ur payroll. (16/n)

(Q) Clear on EPF, but you also said something about Insurance, right?

(a) As stated earlier, EDLI is bundled with EPF, there is no requirement of enrolling for this scheme separately and all EPF members indubitably come under the umbrella of EDLI (17/n)

(b)Consider this as a term plan with variable sum insured (which mainly depends on remuneration of the member. A detailed calculation is done in the blog. Link at the end).
(c) The premium of this term plan is paid by the employer (0.50% additional over and above 12%) (18/n)

(d) No threshold for length of service to be eligible for this scheme.
(e) Age, health conditions, lifestyle habits, nothing matter, all members are covered (19/n)

(f) Minimum benefit shall nt be less than 2.5 Lakh & the assurance benefit shall nt exceed 7L & hence it may nt b enough but it adds on 2 the existing term cover u will have
(g) EDLI contribution are like term insurance premium, no monetary investment like return 4 member (20/n)

(Q) What about pension (EPS)?

Similar to EDLI, employee doesn’t contribute towards this scheme. Employer’s contribution equivalent of 8.33% of the basic+DA, subject to a maximum of INR 1,250. (21/n)

In the case the 8.33% is less than 1,250, the government also tops it up by 1.16% of the member’s basic salary. Maximum contribution in EPS remains at INR 1,250 even if both employer and government contribute.

No interest is paid on the EPS contribution (22/n)

(Q) Who is eligible to receive the pension & how much?
Eligibility - Minimum 10 years of service and 50 years of age
Amount – Depends on the employee’s salary and years of service, calculation in the blog at the end. (23/n)

Is this interest rate of 8.5% for FY 2019-20 sustainable? NO.

GOI 10 Yr bond is trading @ 5.8%
85% of the EPF investments r in Debt, out of which close to 50% in government sec. If I assume, yield of 7.5% on this 85% corpus, equity has 2 deliver return of approx. 14% (24/n)

Heres the link to the blog, which covers multiple other areas around EPF by @stepbystep888 fpa.edu.in/blog/employers…
(a)Tax free investments 4m the employer capped @ 7.5L
(b)The new Wage Code
(c)EPFO crediting interest in one go affect the compounding of the fund? & more (25/26)

Hope the thread added value :) Hit the 're-tweet' and help us reach more investors. We have written multiple similar educative threads on personal finance. You can find them as a pinned tweet on my profile or click the link below (**END**)

https://twitter.com/kirtan0810/status/1337953717274832896?s=20

EPS* and not NPS