You can make more money than the stock market without risk in EPF
Often people believe that investing in the stock market makes more money, while EPF i.e. Employees Provident Fund is considered a safe but low -return option. But recently a chartered accountant (CA) has told that in certain circumstances, EPF can prove to be more beneficial than shares. Yes, PF with only 8.25% annual interest can also overtake the investment in which returns of 12% to 15% are being received. It may sound strange to hear, but the whole mathematics behind it is very interesting and this is what we are going to explain to you.
One invested money in PF, the other in the stock market … what got what
Chartered Accountant Nitesh Buddhadev has told through the story of two employees how much investment option can benefit. The annual salary of both is ₹ 26 lakh, while their basic salary is ₹ 1 lakh per month. Both have started their jobs after 1 September 2014. Such employees can also choose the option not to invest in EPF.
The first employee deposits ₹ 12,000 in the EPF account from his salary every month. The company also deposits the same money. That is, a total of ₹ 24,000 is deposited in PF account every month. Since the basic salary of this employee is more than ₹ 15,000 and has started a job after 2014, his full contribution goes to EPF and does not go to the Pension Scheme (EPS). Five years later, about ₹ 17.75 lakhs are deposited in the PF account of this employee and this entire amount is tax free.
What happened to the employee investing in the stock market?
Now let’s talk about the other employee, who refused to put money in the EPF and started investing directly in the stock market, full ₹ 24,000 every month. But one thing is going to understand here. The ₹ 12,000 company used to deposit in PF, now it will be directly added to his salary and will have to pay tax on it. Suppose the employee is in a tax slab of 30%, then he will have to pay a tax of about ₹ 3,744 on it. That is, now he will have only ₹ 20,256 not ₹ 24,000 for investment.
Why did the PF lag behind PF despite 11% returns in shares?
Suppose another employee gets a return of 11% annually on his share investment. But even after five years, his total money is made around ₹ 15.75 lakh and he also has to pay some tax on it. At the same time, the employee investing in PF may get only 8.25% annual interest, yet after five years his PF balance reaches ₹ 17.75 lakh, that too tax free. This means that despite getting low returns, the employee with PF earns more than an employee investing in the stock market.
Why PF was ahead of the stock market?
The government has given EPF the status of EEE (examept-exmept-exempt) tax. This means that when you put money in EPF, then there is no tax on it. The interest that is received throughout the year is also completely tax free. And even when you withdraw your money, you are still completely free from tax, provided you have done a job at least five years.
On the contrary, long -term capital gains tax is applied to the earnings from the stock market. If your earnings are more than a year old and above ₹ 1 lakh, then you have to pay 12.5% tax on it. How much returns are needed in shares, so that PF can be beaten? According to Chartered Accountant Nitesh Buddhadev, if the second employee invests ₹ 20,256 every month, he will have to earn about 16% annual return (after tax deduction) to get ₹ 17.75 lakh in five years. And it is not so easy to get this return.