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Interest rate of 9.50 % on Employees Provident Fund (EPF) makes them attractive vis-à-vis other traditional savings instrument
Sep 15, 2010

The News
In a surprise but encouraging move, the government increased the interest rate offered in the employees’ provident fund (EPF) by 1 percentage point to 9.5 % per annum for the current fiscal year that ends in March 2011.
Over 4.4 crore workers and employees of the public and private sectors in the country will receive an interest rate of 9.5% pa instead of 8.5% pa for financial year 2010-11 for their savings in the Provident Fund account.
The move to increase the interest rate by one percentage point was taken at a meeting of the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO). The recommendation of the EPFO trustees will now be forwarded to the finance ministry. The finance ministry, which notifies the provident fund interest rate, usually accepts the recommendation of the board of trustees of EPFO.
The move is expected to benefit nearly 4.71 crore employees in public and private sectors. This is the first that the interest rate on provident fund deposits has been increased to 9.5% since 2004-05. With this hike in interest rate, EPFO deposits become more attractive than bank fixed deposits, which at present are offering interest in the range of 7-7.5 per cent. The rate hike is expected to put pressure on companies with independent PF trusts, as they are required to match the PF rate declared by the government.
Analysis & Comments
Three cheers for the govt. & the EPFO department for raising the interest rate to an attractive 9.5% pa. this will at least make it beat inflation which is very high in india and shall remain high in the near future. With this move, the EPF becomes one of the most remunerative fixed income instrument in our country. Have a look at the graphic below:
Comparison of Real Rate of Returns across various instruments

Traditional Savings InstrumentInterest Rate (% pa)Inflation Rate (% pa)Real rate of Return (% pa)
Employees Provident Fund Or EPF (FY 2010-11)9.50 % pa6.50 % pa3.00 % pa
Senior Citizens Savings Scheme (SCSS)9.00 % pa6.50 % pa2.50 % pa
Public Provident Fund (PPF)8.00 % pa6.50 % pa1.50 % pa
Bank Fixed Deposits (FDs)6.75% pa to 7.50 % pa6.50 % pa0.25% pa to 1.00 % pa
Debt Mutual Funds7.00 % pa to 8.50 % pa6.50 % pa0.50 % pa to 2.00 % pa
Monthly Income Plans (Mutual Fund MIPs)10.00 % pa to 12.00 % pa6.50 % pa3.50 % pa to 5.50 % pa
Equity Mutual Funds *15.00 % pa to 18.00 % pa6.50 % pa8.50 % pa to 11.50 % pa

*market linked; past 5 years CAGR returns
It is very clear from the table above that with the 1% hike, the EPF @ 9.50% pa has become more remunerative for the Indian investors & even better than Senior Citizens Savings Scheme (@ 9% pa) & PPF (@ 8% pa). The all season & investors favorite Bank Fixed Deposits (FDs) is no match for any of the above three, at least at today’s prevailing rate.
Also, always compare the rate of return from a savings instrument to the inflation rate to see how remunerative a particulars investment is in terms real rate of return. As is clear from the table above, on a post inflation basis, Bank FDs are not very remunerative at the prevailing rates of interest. So give the FDs a miss for know. Monthly Income Plans (MIPs) are an attractive option if you have a tenure of 1.5 years & have tradinally given double digit returns with a minor exposure to equity.
For Salaried employees
So, if you are salaried, invest the maximum possible allowed to you in EPF this year (as it shall guarantee a 9.50% pa return for you), the balance amount can be deployed in variety of Mutual funds (including Tax Saving Mutual Funds or ELSS) based on your investment tenure. Consider MIPs & equity diversified mutual funds for better returns. Give the PPF & Bank FDs a miss for this financial year.
For Self employed
If you are self employed professional or a businessman, EPF is not available to you. Your next best risk-free investment is PPF (@ 8% pa tax free). However, if the only purpose of investing in PPF is to save tax, then I would suggest that you skip PPF for the next 2 financial years & invest in Tax Saving Mutual Funds or ELSS (Link). Click on the link to find out why I am asking you to skip other avenues u/s 80C this financial year & stick to ELSS.
Sound Investing !!!!

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