EPF (Employee Provident Fund) is one such option for employees working in an office, where they contribute a part of their income monthly or yearly, and stock money for their retirement. The second reason for contributing money to EPF was it was eligible for tax-deduction. However, in the Union Budget 2021, it has been made clear that from the next financial year that is April 2021 any interest you earn on your employee's provident fund (EPF), on a contribution above Rs 2,50,000 lakh a year, will get taxed at the prevailing rates!
After this, the investment of those investors is questioned who had increased their contribution to EPF on a large scale only to reap the benefits of non-taxable, guaranteed returns.
EPF currently offers 85% interest per annum on deposits made by the employees in the company they work. The company gives employees the choice to select the amount they want to contribute to EPF.
After the new announcement made regarding the tax trends in EPF, if you are in the highest tax bracket of the personal income tax ladder, you will end up paying tax at anywhere between 35.9%-42.5% each year on the excess interest earned on your EPF contribution every year.
All this has created confusion among the investors regarding their choice of investment. They are in dilemma, whether it is worth staying invested in EPF after all this taxation scenario, or now this is the time to reconsider your investment and switch?
Maintain A Mix Asset Allocation!
EPF in your portfolio constitutes the part of fixed income as it guarantees fixed return, people contributing to EPF generally carry it till their retirement, it helps them accumulate a good part of their retirement corpus. In case if they switch their EPF investment to Equity class, basically they switch to high risk from no risk.
However, in case you already have your stable return part of the portfolio in some other form or accumulated already, then without any confusion, you can go switching your voluntary EPF contribution to long term equity.
Basically, you have to take care that your portfolio is balanced, and in case you plan to switch from EPF to equity then make sure that you are putting only those voluntary contributions of EPF to the equity class.
Make Your Long-term Portfolio More Tax Efficient!
If you one among those who already have increased their EPF contribution voluntarily then you might have landed in a dramatic situation.
This is because you may not be able to make changes or reduce the EPF amount as it is linked to their basic salary. This means now you will be likely paying higher taxes, and you will also experience a reduction in your saving amount.
This means that now you can very little for this forced outgo, now you might tempt to compensate this outgo by adding more to your long-term equity basket. Here you have only this as a choice because you cannot reverse or cut down your EPF contributions.
Keeping all this in mind, it is the best option to make your long-term portfolio more tax-efficient as a retirement tool. From here, you have to now make your Equity contribution a more enhanced return generating investment and a more tax-efficient part of your portfolio.
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(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).