With the Union government looking to allow select sectors to cut monthly statutory deductions on account of the Employees’ Provident Fund (EPF), the take-home salary of employees in the organised sector is slated to go up soon. The change of rules — part of the Social Security Code Bill 2019 and expected to be tabled in Parliament soon — will allow employees to pay less than the current 12% statutory contribution, while the contribution of the employer may remain the same at 12%.
This news has reportedly made a large number of salaried people happy as they will be able to spend more with the increase in their take-home pay. After all, who does not like to have more money in one’s pocket? However, will this be really good for their future and should they go for any reduction in their EPF contribution?
Financial experts say that the news of relaxation in the mandatory deductions on account of EPF in certain sectors has brought cheer to the salaried class. This will certainly increase their take home salary and getting more money in the pocket is something which brings happiness to everyone. While there is no doubt that this will help boost consumption and may also help revive economic growth. However, this will be a very negative development for the long run.
Ashish Kapur, CEO, Invest Shoppe India Ltd, says, "We are currently a young nation. But slowly and surely, our population will start ageing on the back of both declining birth rates and increasing life spans. This will increase the importance of having a nest egg to look after your needs when you are old and retired. By doing away with the mandatory savings in EPF, we are putting a vast section of our population at risk of going into retirement with inadequate financial security. Given the choice between saving and spending, nearly everyone would opt for the latter. Spending creates a much better feel good factor than saving. We are living in an age where nearly everyone is seeking instant gratification. Hence, the option to spend will win almost every case."
Watch This: How To Withdraw PF Online in Simple Steps
It, however, must be remembered that our previous generations always saved money and were conservative in their spending habits. This has changed completely over the last few decades. "Millennials believe in living it up and if they cannot support their lifestyle by their current means, they have absolutely no hesitation in borrowing to bridge the gap. The large pool of savings created by our forefathers have helped us whither many financial turbulences. Any legislation which seeks to undermine this safety net would be detrimental not just at an individual level, but for the society and nation as a whole. This is another reason why the current move to dilute the regulatory savings is an unwelcome one," informs Kapur.
Another reason being that from a joint family system, we are gradually moving towards single family structures. The number of children per family has also reduced. The age-old tradition of being looked after in your old age by your children and grand children is going away. This further increases the importance of financial security at the time of retirement.
According to financial experts, short-term measures to spur consumption by putting more funds in the hands of the working Indian are welcome, particularly in the current economic scenario. However, once the short-term problems have been solved, it would be wise for investors to switch back to higher contributions. After all, this is for their own benefit. Higher voluntary contributions towards their EPF account would help them save more for their future needs.
"EPF offers a superb rate of return of 8.65% per annum. This rate of return is much higher than what's been currently offered on several other debt investments. For example, the PPF offers 7.9% per annum as does the National Savings Certificate. Most fixed deposits today offer taxable returns of 6-7% per annum. The EPF is one of the best ways to steadily build your retirement corpus. It can also be argued that a reduction of your voluntary EPF contribution from 12% to, say, 6%, would make little difference to your in-hand salary. However, reducing your monthly contributions to a long-term investment would slow down the compounding of your returns, which means you'll have lesser money in retirement," says Adhil Shetty, CEO, BankBazaar.com.
We can, thus, safely say that given all the socioeconomic realities, we should never take away the compulsory saving provisions for the salaried people.