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Keep your EPF money for at least 5 years to avoid tax
THERE is a bit of a concern for salaried individuals as their long-term planning has taken a severe hit recently. When it comes to the area of retirement planning, the employees provident fund (EPF) occupies a significant place in the overall scheme of things.
Over a long working life, a large amount of funds are accumulated in this account and, hence, this becomes important as far as the overall position is concerned. Now, with some changes that have been witnessed here, it is important to look at how things will play out over the future.
Interest rate: One of the important factors in EPF is the interest rate earned by the investment. This rate determines what the individual will take home at the end of the day and the news on this front is not very good.
The interest rate for the financial year 2011-12 has been slashed to 8.25 per cent, compared with 9.5 per cent offered in the year earlier. This is a significant change and, hence, the earnings that have been accumulated till now would earn at this lower rate for the specified year.
Changing rate: A factor that is very important when it comes to the EPF is that the interest rate offered on the instrument is not fixed, in the sense that, at the time of making the investment, the investor will not know what they will end up earning over the life of the instrument.
This is not surprising as this investment will be present for the entire working life and can even stretch to more than a couple of decades. The rate for this instrument is declared during the financial year and, hence, this will be applicable for that particular year.
The situation can change for the next year and will be determined according to the earning that is possible on the investment.
Permanence important: It is very important to look at the trend of the interest rate movement because a situation that was witnessed last time around could actually lead to a lot of disappointment some time down the line.
The interest rate that has been declared has to be permanent or the joy could be short-lived, which means, the investment of the fund should be such that this is able to justify and maintain a higher rate of earnings for the scheme. This is exactly what happened last year as the interest rate climbed to 9.5 per cent.
However, if there are some one-time profits or accounting effects that have led to this kind of situation, then the position can differ and the impact would be reflected in the future. This is precisely what has happened, as the fund has now had to cut the rate since the earnings did not support a high interest rate.
Tax free earnings: It is important to know that the earnings from the fund can be tax-free in the hands of the investor if they are able to ensure that the investment remains with the fund for a period of five years.
In this case, the entire amount of interest earned would not be taxed and, hence, this would become something that has to be maintained in the portfolio.
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