Around 64 million members of the Employees’ Provident Fund Organisation may be affected as the EPF interest rate gets cut to 8.1 per cent, from 8.5 per cent for 2021-22 (FY 22). Reason cited for the cut: market pressures.

Many observers aren’t surprised by the rate cut as the current EPF interest rates were unsustainable. It marks the lowest rate of interest since 1977-78 when it was 8 per cent.

A while back, the government announced that interest on contributions of more than Rs 2.5 lakh a year would be taxed. Given the double whammy, many experts suggest that salaried individuals should start planning their retirement fund earlier in their career and build a diversified portfolio for it.

NPS – Alternative to Employee Provident Fund in the face of interest cut

The National Pension System (NPS) is being seen as one of the alternatives to create a retirement corpus. And it has been gaining popularity in recent times. The number of subscribers under various NPS schemes shot up by 22.31% in a single year to exceed 50.72 million by February 2022, according to the Pension Fund Regulatory and Development Authority (PFRDA). This has been a clear sign that people are looking at various resources to plan their retirement.

Why will EPF still be popular?

Despite the interest rate cut, EPF will continue to hold appeal. The tax-efficiency at the contribution, investment/accumulation and maturity stages continue to hold value for those investing in it.

Also, alternatives such as the NPS were market-linked (even though the compound annual growth rate for the last five years on Scheme E tier 1 has been around 14%). Hence, many, especially those with a lower risk appetite, would continue to stay with EPF rather than opt for a market-linked pension scheme.

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