Employees' Provident Fund (EPF) which is the main scheme under EPFO, is offering an interest rate of 8.1% which is the lowest since 1977-78. The provident fund deposits scheme has reached a four-decade low. However, EPF is still currently offering better returns than compared to many post office small saving schemes and bank fixed deposits. Towards EPF, both employer and employee contribute 12% of the employee's basic salary and dearness allowance. Earlier, the interest rate on EPF was at 8.5%.
Earlier this week, Finance Minister Nirmala Sitharaman has defended the proposal to trim the interest rate paid on employees' provident fund deposits. She stated that this is a decision taken by the EPFO Central Board which has a wide spectrum of representatives in it. Also, she explained the comparative prevailing interest rates of other schemes saying Sukanya Samriddhi Yojana offers 7.6%, Senior Citizen saving scheme (7.4%), and PPF (7.1%), while SBI's 5-10 year fixed deposits gives 5.50% interest rates.
The FM stated that "Yes, 40 years. There are today's realities that do keep us in the context of decisions taken by the Central Board of the EPFO."
It's Sitharaman-led ministry who is the nodal authority for approving the recommendation of the Central Board of EPFO.
Post Office Savings Schemes:
Post Office Time Deposit Account (TD): The scheme gives a 6.7% rate on the tenure of 5 years. The lowest rate offered here is 5.5% on 1-3 years tenure. Its interest is payable annually but calculated quarterly. The account can be opened with a minimum of ₹1000 and in multiples of ₹100. No maximum limit for investment.
Post Office Monthly Income Scheme Account (MIS): Being one of the PO small savings schemes, it offers 6.6 % per annum payable monthly. Minimum monthly investment here can begin from ₹1,000 but can be extended to a maximum of ₹4.5 lakh in a single account and ₹9 lakh in a joint account.
Senior Citizen Savings Scheme (SCSS): This scheme is meant for senior citizens above 60 years of age. The scheme offers a 7.4% interest rate and is payable on 31st March, 30th June, 30th Sept, and 31st December. The minimum investment here is ₹1,000 and the maximum up to ₹15 lakh. Investment under this scheme qualifies for the benefit of ₹1.5 lakh under section 80C of the Income Tax Act, 1961.
Public Provident Fund Account (PPF): PPF is a long-term investment scheme with a tenure of 15 years. Interest earned on this scheme is tax-free under the IT Act, while deposits quality for ₹1.5 lakh benefit under section 80C. A minimum deposit of ₹500 and a maximum deposit of ₹1.50 lakh is allowed in a financial year. A PPF account holder earns a 7.1% rate on their investments under this account.
Sukanya Samriddhi Accounts (SSA): This scheme is meant for a girl child as it motivates parents to begin investment at a low amount and build funds for the girl child's future education or marriage expenses. This account can be opened for a maximum of two girls in a family. Provided in case of twins/triplets girls birth more than two accounts can be opened. A minimum investment of ₹250 is allowed and can go up to a maximum of ₹1.5 lakh in a financial year. The interest earned on these accounts is tax-free, while the deposits qualify for benefits under section 80c of the IT Act. An interest rate of 7.6% per annum is offered on this scheme.
Fixed Deposits:
SBI FDs below ₹2 crore:
At SBI, a 5.50% interest rate is offered on tenure for 5 years and up to 10 years, the rate is 6.3% for senior citizens for the same term. Meanwhile, in the general category, 5.45% rate is offered on 3 years to less than 5 years, 5.20% on 2 years to less than 3 years, and 5.10% on 1 year to less than 2 years.
For senior citizens, the bank offers a 5.95% rate on 3 years to less than 5 years, 5.70% on 2 years to less than 3 years, and 5.60% on 1 year to less than 2 years.
HDFC Bank FDs below ₹2 crore:
The private banker gives 5.60% to the general category and 6.35% to senior citizens on 5 years 1 day - 10 years.
In the general category, the bank gives a 5.45% rate on 3 years 1 day- 5 years, 5.20% on 2 years 1 day - 3 years, and 5% on 1 year 1 day - 2 years. On 1-year tenure, the bank also gives a 5% interest rate.
To senior citizens, 5.95% is offered on 3 years 1 day- 5 years, while 5.70% rate is applicable on 2 years 1 day - 3 years. As for 1 year to less than 2 years, the bank gives a 5.5% rate.
ICICI Bank FDs below ₹2 crore:
Just like HDFC Bank, ICICI Bank also offers 5.60% and 6.35% interest rates to general and senior citizens on 5 years 1 day to 10 years.
The lender also has a tax saver fixed deposits where it gives 5.45% to the general category and 5.95% to senior citizens on a period of 5 years. The maximum aggregate amount that can be invested in the Tax Saver FD (80C FD) under a single PAN is ₹150,000 and the same cannot be closed prematurely before the expiry of the lock-in period of 5 years.
The bank offers between 5-5.45% rates on tenures from 1 year to less than 5 years, while senior citizens enjoy interest rates ranging from 5.5-5.95% on similar tenures.
With that, it can be said that the EPF interest rate even though is at a four-decade low, yet is attractive compared to the above-mentioned schemes.
New Income Tax rules on EPF interest:
Before April 1, 2021, the interest on EPF was fully tax-free in the hands of provident fund contributors however the government modified the rules in Budget 2021 and now interest accrued on EPF contribution beyond a particular threshold will be taxable.
Under the new rules, any interest credited to the provident fund account of an employee shall be tax-free only for contributions up to 2.50 lakh every year and any interest on an employee's contribution over 2.50 lakh shall be taxed in the hands of the employee year after year. In case the employer does not contribute to the provident fund of the employee, then the threshold applicable will be ₹5 lakh of the employee's contribution, says tax expert Balwant Jain.
It needs to be noted that the ₹5 lakh limit covers about 93% of the people who are EPFO subscribers and they will continue to get assured tax-free interest, according to the interest rate announced by EPFO every year. Jain also added, "Please note it is the interest on the excess contribution which will become taxable and not the contribution itself. The excess contribution cannot be taxed as the contribution is made by the employee from his salary which already gets taxed."
Also, both employer and employee contribute 12% each from the employee's basic salary plus dearness allowance. Notably, of the total employer's contribution, 8.33% goes to Employees Pension Scheme (EPS) which earns no interest.
That said, as far as, the balance standing to the credit of an employee as of 31st March 2021 is concerned, interest on this non-taxable account will continue to remain tax-free. However, it will be interest earned on the second account that will be taxable every year.
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