The Employees’ Provident Fund Organisation (EPFO) is considering raising the equity allocation of the Employees’ Provident Fund (EPF) scheme from the current 15% to 25%, according to a Mint report. However, rather than making this applicable to all subscribers, the higher allocation may be offered as an option to employees on relatively high salaries.
The EPF has about 5 crore subscribers, 75% of whom are estimated to earn less than Rs 15,000 per month. Also, the equity allocation policy applies to incremental flows and not its overall corpus.
For instance, if you have an accumulated balance of Rs 5 lakh in the EPF and your annual contribution is Rs 50,000, only 25% of 50,000 will be invested in equities and not 25% of Rs 5 lakh.
The EPF started its equity foray with a 5% allocation in 2015. This was gradually hiked to 10% and then 15%. To get an idea of the size of the money this involves, note that the EPF corpus is over Rs 10 lakh crore and it receives incremental flows of about Rs 1 lakh crore every year.
EPF Returns are still guaranteed
Despite now having a small portion of its corpus in market-linked instruments, the EPF still has an administered interest rate. Last year (2016-17) this was 8.65% and is likely to remain the same. We give you a history of EPF and PPF rates here.
The EPF invests in equities through exchange-traded funds or ETFs. In November 2017, the EPF decided to directly credit these units into the accounts of subscribers. As reported in the Indian Express, these units will earn returns linked to the market while the rest of the subscriber’s balance will continue to earn the administered interest rate.
When a subscriber withdraws, he will get back the accumulated balance as per administered interest rates on the non-equity portion of his EPF account. On the equity portion, he will get the market value of his ETF units.
The EPF is currently mandatory for employees working in firms with more than 20 workers who earn less than Rs 15,000 per month. The government has proposed to raise this ceiling to Rs 25,000. A 12% of your wages are deducted for the EPF per month and this amount is matched by your employer. You can withdraw from the EPF when you turn 58 or are unemployed for 2 months or more or on specified grounds. You can read about these here.