Rakesh Sood has a no-sweat investment strategy: he simply puts all his long term savings into his employer’s provident fund (EPF). His reasoning: since he is in the 30 per cent tax bracket, he gets a tax-free return of almost 13.69 per cent in a zero risk instrument, the only downside being that this money is locked up for the long term. Sood uses debt and cash funds for his short term needs, some equity funds for medium term needs and his retirement money, he aggressively puts into EPF. Sood is smart, he is using a government subsidy to the rich to fatten his long term investments legally. You can do the same. The Scheme12 per cent of your basic salary goes towards a mandatory provident fund kitty. Your employer matches this 12 per cent and 24 per cent of your basic salary accumulates earning a return of 9.5 per cent. You can put in more than 12 per cent of your basic into this account, without a matching contribution from your employer, who will stop once he reaches the maximum threshold of 12 per cent. You get a return of 9.5 per cent on the entire amount in the EPF account and not just the mandatory amount. Even better, you get a tax rebate under Section 88 till you reach a threshold income level of Rs 5 lakh. Better still, the final corpus is tax free. At a return of 9.5 per cent, a person in the 30.6 per cent tax bracket gets an effective (tax adjusted) annual return of 13.69 per cent. But the 9.5 per cent rate is under debate. The Government wants to reduce it to 8 per cent in line with other small savings rates like the public provident fund (PPF), but the trade unions actually want a hike to 12 per cent. Wisdom and financial prudence say that the rate will touch 8 per cent. At even this rate, those in the highest tax bracket get an effective rate of 11.53 per cent. With inflation at about 5 per cent, a real risk free return of 6.53 per cent is more than good! The caveatGovernments can change the rules. The new pension scheme has already been made EET (exempt, exempt and taxed), that is the contribution to the scheme is exempt from tax, the annual accrual to the money is exempt, but the final corpus or pension will be charged. If this is extended to the PF, the numbers will change. Till then, use this as a long term accumulation instrument.
