Employee Provident Fund Regulations Revised
The Employee Provident Fund regulations have been revised and have undergone several changes recently. These include increasing the equity investment, allowing employees to withdraw the entire corpus in case of a job loss, and a likely lower contribution by employers and employees. These changes offer flexibility for subscribers regarding withdrawal and a potential for the fund to earn higher returns. However, it could also mean higher variation in the fund's performance. We take a look at these changes and how they will impact you.
Implications of Lowering EPF Contributions
Q: There is a proposal to lower the contribution to the EPF to leave more money in the hands of an employee. What will be the implication of this?
A: EPF is a product designated for creating a corpus for retirement. It has been in place since 1956 but caters only to the organized sector. The unorganized sector is much larger than the organized sector and is largely not sensitized about retirement planning. The EPF enjoys generous tax breaks and a safe haven status, as well as being bounded by regulations. However, the real reason it exists—that it is a retirement product—is secondary knowledge. There is a greater need to emphasize the requirement of retirement planning, which will require realistic retirement goal setting. It is far more important for the EPFO to focus on defining the actual need for a retirement kitty, rather than focusing on the populist measure of lower contributions.
EPFO's Investment in Stocks
Q: How much is the EPFO currently investing in stocks? How much more have they been allowed to invest?
A: Currently, the government permits a maximum of 15% of contributions to be invested in equity. The government is considering increasing the 15% ceiling limit (set in 2015). However, though the limit may increase, it is for the Trustees to decide whether they would actually use this limit or not. So far, the overall investment was routed through Nifty/Sensex-based Exchange Traded Funds.
Risk Assessment of EPF
Q: Is the EPF riskier now?
A: Investing in equities is riskier than investing in sovereign debt. The risk is mitigated to an extent only with diversification, research, and tenure of investment. The combination of these three issues can offer a superior risk-adjusted return.
EPF Returns Compared to Mutual Funds
Q: Will EPF returns vary as much as mutual funds?
A: The EPFO return has always varied. The Trustees used to declare returns based on investment performance at the completion of each year. However, with incremental investment in equity, the gyration will be more in the future.
Informing Subscribers About Returns
Q: How are subscribers informed about the returns?
A: The Central Board of Trustees approved a policy to credit units linked directly to exchange-traded funds into members' accounts. The invested corpus may thus get bifurcated into debt and equity portions. The equity portion may be reported based on NAV, but this is not a ground reality.
Subscriber Control Over Equity Investment
Q: Can a subscriber refuse to have any equity investment?
A: As of now, the subscriber can't dictate where their fund should go. It is up to the Trustees to decide based on government guidelines. The model is more of a 'one size fits all' model.
Investment Rules for Private Trusts
Q: Will the same investment rules apply if a private trust is managing the provident fund?
A: As per law, the exempted trust should follow the same investment pattern as dictated by the government. However, the investment may not be restricted only to ETFs in their case.
Impact of Withdrawal on Retirement Savings
Since subscribers can withdraw their entire fund in case of job loss, what will be the impact on retirement savings?
PF will now be regarded more as a Sabbatical Fund than a Retirement Fund. More successful retirement funding models, like the US 401K, are successful because they made it optional for subscribers. However, the design and incentive are such that once there is a buy-in, the subscriber is bound for life. We need to appreciate that in India, we do not have a Social Security model, and people will be at large when the income stops.
From India, Ghaziabad
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256The Employee Provident Fund regulations have been revised and have undergone several changes recently. These include increasing the equity investment, allowing employees to withdraw the entire corpus in case of a job loss, and a likely lower contribution by employers and employees. These changes offer flexibility for subscribers regarding withdrawal and a potential for the fund to earn higher returns. However, it could also mean higher variation in the fund's performance. We take a look at these changes and how they will impact you.
Implications of Lowering EPF Contributions
Q: There is a proposal to lower the contribution to the EPF to leave more money in the hands of an employee. What will be the implication of this?
A: EPF is a product designated for creating a corpus for retirement. It has been in place since 1956 but caters only to the organized sector. The unorganized sector is much larger than the organized sector and is largely not sensitized about retirement planning. The EPF enjoys generous tax breaks and a safe haven status, as well as being bounded by regulations. However, the real reason it exists—that it is a retirement product—is secondary knowledge. There is a greater need to emphasize the requirement of retirement planning, which will require realistic retirement goal setting. It is far more important for the EPFO to focus on defining the actual need for a retirement kitty, rather than focusing on the populist measure of lower contributions.
EPFO's Investment in Stocks
Q: How much is the EPFO currently investing in stocks? How much more have they been allowed to invest?
A: Currently, the government permits a maximum of 15% of contributions to be invested in equity. The government is considering increasing the 15% ceiling limit (set in 2015). However, though the limit may increase, it is for the Trustees to decide whether they would actually use this limit or not. So far, the overall investment was routed through Nifty/Sensex-based Exchange Traded Funds.
Risk Assessment of EPF
Q: Is the EPF riskier now?
A: Investing in equities is riskier than investing in sovereign debt. The risk is mitigated to an extent only with diversification, research, and tenure of investment. The combination of these three issues can offer a superior risk-adjusted return.
EPF Returns Compared to Mutual Funds
Q: Will EPF returns vary as much as mutual funds?
A: The EPFO return has always varied. The Trustees used to declare returns based on investment performance at the completion of each year. However, with incremental investment in equity, the gyration will be more in the future.
Informing Subscribers About Returns
Q: How are subscribers informed about the returns?
A: The Central Board of Trustees approved a policy to credit units linked directly to exchange-traded funds into members' accounts. The invested corpus may thus get bifurcated into debt and equity portions. The equity portion may be reported based on NAV, but this is not a ground reality.
Subscriber Control Over Equity Investment
Q: Can a subscriber refuse to have any equity investment?
A: As of now, the subscriber can't dictate where their fund should go. It is up to the Trustees to decide based on government guidelines. The model is more of a 'one size fits all' model.
Investment Rules for Private Trusts
Q: Will the same investment rules apply if a private trust is managing the provident fund?
A: As per law, the exempted trust should follow the same investment pattern as dictated by the government. However, the investment may not be restricted only to ETFs in their case.
Impact of Withdrawal on Retirement Savings
Since subscribers can withdraw their entire fund in case of job loss, what will be the impact on retirement savings?
PF will now be regarded more as a Sabbatical Fund than a Retirement Fund. More successful retirement funding models, like the US 401K, are successful because they made it optional for subscribers. However, the design and incentive are such that once there is a buy-in, the subscriber is bound for life. We need to appreciate that in India, we do not have a Social Security model, and people will be at large when the income stops.
From India, Ghaziabad
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EPF is a critical retirement savings tool for employees in India. The recent revisions in regulations, such as allowing full corpus withdrawal in case of job loss and potential lower contributions, do impact retirement savings significantly. Here are some key points to consider:
1. Lower EPF Contributions Implications:
- Lowering EPF contributions may provide short-term relief to employees by leaving more money in their hands. However, it is essential to emphasize the importance of retirement planning and setting realistic retirement goals to ensure financial security post-retirement.
2. EPFO's Investment in Stocks:
- The EPFO currently invests a maximum of 15% in equity. Any increase in this limit would depend on the Trustees' decision. Diversification, research, and investment tenure play crucial roles in mitigating risks associated with equity investments.
3. Risk Assessment:
- Investing in equities carries higher risks compared to sovereign debt. Proper diversification and a long-term investment approach can help in achieving better risk-adjusted returns.
4. EPF Returns vs. Mutual Funds:
- EPF returns have varied historically and may continue to do so, especially with increased equity investments. Subscribers should be prepared for potential fluctuations in returns.
5. Informing Subscribers About Returns:
- Subscribers are informed about returns through a policy that credits units linked to exchange-traded funds into their accounts. However, the actual reporting based on NAV may differ from ground reality.
6. Subscriber Control Over Equity Investment:
- Currently, subscribers cannot choose to avoid equity investments. The decision lies with the Trustees based on government guidelines.
7. Impact of Withdrawal on Retirement Savings:
- Allowing subscribers to withdraw their entire fund in case of job loss may shift the perception of EPF from a retirement fund to a sabbatical fund. It is crucial to educate individuals on the importance of long-term retirement planning and financial security beyond immediate needs.
In conclusion, while the revised regulations offer flexibility, it is essential for subscribers to understand the implications on their retirement savings and make informed decisions regarding their EPF contributions and investment choices.
From India, Gurugram
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1. Lower EPF Contributions Implications:
- Lowering EPF contributions may provide short-term relief to employees by leaving more money in their hands. However, it is essential to emphasize the importance of retirement planning and setting realistic retirement goals to ensure financial security post-retirement.
2. EPFO's Investment in Stocks:
- The EPFO currently invests a maximum of 15% in equity. Any increase in this limit would depend on the Trustees' decision. Diversification, research, and investment tenure play crucial roles in mitigating risks associated with equity investments.
3. Risk Assessment:
- Investing in equities carries higher risks compared to sovereign debt. Proper diversification and a long-term investment approach can help in achieving better risk-adjusted returns.
4. EPF Returns vs. Mutual Funds:
- EPF returns have varied historically and may continue to do so, especially with increased equity investments. Subscribers should be prepared for potential fluctuations in returns.
5. Informing Subscribers About Returns:
- Subscribers are informed about returns through a policy that credits units linked to exchange-traded funds into their accounts. However, the actual reporting based on NAV may differ from ground reality.
6. Subscriber Control Over Equity Investment:
- Currently, subscribers cannot choose to avoid equity investments. The decision lies with the Trustees based on government guidelines.
7. Impact of Withdrawal on Retirement Savings:
- Allowing subscribers to withdraw their entire fund in case of job loss may shift the perception of EPF from a retirement fund to a sabbatical fund. It is crucial to educate individuals on the importance of long-term retirement planning and financial security beyond immediate needs.
In conclusion, while the revised regulations offer flexibility, it is essential for subscribers to understand the implications on their retirement savings and make informed decisions regarding their EPF contributions and investment choices.
From India, Gurugram
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