Does it make sense to Opt Out of EPF benefits ?

POSTED BY chinthub ON April 10, 2014 11:48 am COMMENTS (11)

My sister graduated and got hired by a good company with a good offer. Her monthly pay would be more than 6500.

I have read many articles that most people these days are opting out of EPF as its returns, compared to other investments, are less.

For eg: EPF is compounded yearly, whereas a recurring deposit is compounded quarterly and is tax exempted as well. As of the current scenario RD with SBI has an interest rate of 9% where EPF is 8.75%.

Kindly advise if opting out of EPF is good or not. If its good, please point out its other benefits as well

Thanks,

Amith

11 replies on this article “Does it make sense to Opt Out of EPF benefits ?”

  1. Vaibhav Goyal says:

    From what I know, Employer will give their contribution only if Employee himself is contributing towards his PF. So if Employee opts out, employer will not be liable to contribute. Thus she will not get Employer’s contribution in hand, if she opts out of PF.

    I also did some googling and found below link to support my comment:
    http://www.citehr.com/472741-can-employee-opt-out-epf-form-1-a.html

    Thus I am reasonably confident about what i said above, but still to be on safe side I’d advise that your sister get this point confirmed with her HR dept.

    1. chinthub says:

      Thanks Vaibhav.

  2. Vaibhav Goyal says:

    As per rule – One can opt out of EPF at the beginning of the career provided the salary is more than Rs.6,500/-. Opting out at a later date is not possible.

    So in this case, Amith’s sister has the option of opting out of EPF since she is beginning her career and has never been a part of EPF.

    However I wouldn’t advise to do so – Mainly bcoz though she will save the Employee contribution and get it in hand, and can invest it in other avenues like MFs, but she’ll completely lose out on the 12% Employer’s contribution which she would have otherwise got under EPF. This loss is likely to be more than any gain she would make by investing her contribution in other avenues.

    1. chinthub says:

      Thank you Vaibhav!

      Can you please reconfirm the part that you mentioned that “she’ll completely lose out on the 12% Employer’s contribution”? My understanding was that she will get 12% of her basic salary and 12% of employers’ contribution as well with her monthly pay.

  3. ashalanshu says:

    Dear Chinthu, EPF is not optional. It’s mandatory if the employer in question has more than 50 employees on it’s payroll. Should I say more? 🙂

    Thanks

    Ashal

  4. Hemanth Chandra says:

    Sorry typo mistake…. it not Muthu, its Amith

  5. Hemanth Chandra says:

    Dear Muthu,

    As you said, “whereas a recurring deposit is compounded quarterly and is tax exempted as well”, this is wrong that you don’t have to pay tax on RD. You have to pay tax on the interest that you got from RDs. TDS is not applicable for RDs, which doesn’t mean that RD is tax exempted. You have to pay tax on RD.

    Regards,
    Hemanth.

    1. chinthub says:

      Thanks for sharing that info. I was not aware of that.

  6. manikambh says:

    I think you are talking about PPF. I can see in my EPF statement that every month the interest is calculated.

    I recommend you continue with EPF.

  7. chinthub says:

    Thanks Muthu for the reply.

    I am quoting Manish’s reply in one of the EPF related post “Learn about your EPF and PPF in detail”.

    He says there

    “Interest is calculated just one time in a year on the lowest balance between the fifth and the last day of the month of March. So make all your deposits before March 5.”

    I remember reading same information in another article as well. There they mentioned that it’s simple interest that is calculated on each months contribution (Like Manish mentioned between 5th and 25th of every month) and added to the principle amount (i.e. last years balance) only by the end of current financial year. So I suppose its yearly compounded.

    Please correct me if I am wrong.

  8. Muthu Krishnan V says:

    epf is compounded monthly. EPF returns are EEE as of today. calculate SBI after tax interest rate.

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