EPF vs Share Market: Don’t forget to take PF lightly in the stock market boom! Know the 6 big reasons why this EPFO ​​account is many times better and safer than the volatile stock market.

In the last few years, during the historic boom period of the Indian stock market, crores of new retail investors have opened demat accounts. Coming under the influence of social media, fin-influencers and trading reels, today’s youth is dreaming of quick returns of 15 to 20 percent. The most worrying trend being seen in this race is that a large number of youth and working professionals have started considering the Employee Provident Fund (EPF) deducted from their salary as a ‘burden’ or a traditional instrument giving low returns. Many people even start thinking that if instead of deducting the PF money, they get it in the form of in-hand salary, then they can become rich faster by investing it in the stock market or Futures and Options (F&O).

However, veteran economists with a deep understanding of financial risks, market crashes and retirement planning consider this a suicidal idea. The Employees’ Provident Fund Organization (EPFO) and the Labor Ministry have also recently underlined that PF is not just a savings account, but it is an impenetrable fortress of lifelong financial security, sovereign guarantee and social security for every salaried citizen of the country. When the stock market dives by 20 to 30 percent due to unexpected global recession, war or economic crisis, then this EPF account grows at a compound rate, keeping your money safe without any stress. Let us know those 6 solid and irrefutable reasons due to which EPF seems to be miles ahead of any uncertain investment in the stock market.

The most basic reality of the stock market and equity mutual funds is that their returns are never ‘guaranteed’. If the stock market crashes due to global geopolitical tensions, rising interest rates or a recession, your portfolio could remain in the red for months or even years. In contrast, your hard-earned money deposited in EPF has a ‘Sovereign Guarantee’ by the Government of India, which means that there is absolutely zero (0%) risk of loss on your principal.

Currently EPFO ​​is giving fixed and attractive interest of 8.25 percent per annum to its shareholders. This rate is much higher than the fixed deposit rates (which range between 6.5% to 7.1%) and inflation rates (5% to 5.5%) of any major commercial bank in the country (like SBI, HDFC, ICICI). To get an imaginary return of 12% in the stock market, you have to face huge volatility on your entire capital, whereas EPF keeps adding safe interest on your money every night without skipping a beat.

Whatever money you invest in the stock market or mutual funds—be it ₹5,000 or ₹50,000—100% of it comes from your own pocket. But the most magical and unmatched power of the EPF system is the ‘Matching Employer Contribution’ of the employer i.e. company.

Under Employees Provident Fund Rules:

• 12% of the employee’s basic salary and dearness allowance (Basic + DA) is deducted from his salary and goes into PF.

• An equal amount (12%) has to be compulsorily deposited by the company from its own pocket for the welfare of the employee.

• Out of this 12% contribution of the company, 3.67% goes directly into the employee’s PF (EPF) account and 8.33% is deposited in the Employee Pension Scheme (EPS-95).

From a financial perspective, this is a direct 100 percent immediate return on your capital on the very first day of investment. No stock market, hedge fund or mutual fund in the world can double your money on the first day, which is mandatory by law in the EPF system. If an employee tries to opt out of PF, he directly kicks out this 12% free corporate fund he gets from his company.

In financial schemes, real profit is what is left in your hands after tax is deducted. EPF enjoys one of the rarest and most coveted statuses in the investment world under the Indian Income Tax Law, called ‘Exempt-Exempt-Exempt’ (EEE Status):

• First Exemption (Rebate on Investment): Under the old tax system, complete tax exemption is available on PF contribution up to Rs 1.5 lakh annually under Section 80C of the Income Tax Act.

• Second exemption (exemption on interest): The 8.25% interest earned annually on a PF account is completely tax-free (provided the employee’s annual contribution is up to ₹2.5 lakh; ₹5 lakh for government employees).

• Third Exemption: The entire maturity corpus received on retirement or leaving the job after completing 5 years of continuous service is 100% tax-free.

Now compare this with the stock market and equity mutual funds. According to the new budget provisions of the Central Government, it is mandatory to pay tax of 12.5 percent on Long Term Capital Gains (LTCG) on shares or mutual funds held in the stock market for more than 1 year (on profits above ₹1.25 lakh). Short Term Capital Gains (STCG) tax of 20 percent is deducted on withdrawal of profits before 1 year. The fund worth crores created by compounding in EPF comes entirely into the employee’s pocket without any tax deduction, which beats the post-tax returns of the stock market.

A direct comparison of the strengths and limitations of both the financial instruments can be understood from this table for the convenience of the employees:

Very few salaried employees are aware that as soon as they become a member of EPF, they automatically get a huge life insurance cover under the Employees Deposit-Linked Insurance Scheme (EDLI Scheme 1976).

Most important things of this scheme:

• If an employee dies untimely due to any reason (illness, accident or natural) during his service period, a lump sum sum assured up to a maximum of Rs 7 lakh is paid to his nominee or legal heir.

• Not even Rs 1 is deducted as premium from the employee’s salary for this insurance cover; Its entire premium (0.5%) is borne by the employer.

• The minimum claim amount has also been fixed at ₹2.5 lakh.

No such security cover is available when investing money in stock market or demat account; If a trader dies untimely, his family gets only the amount left in the account, with no additional insurance support. This inbuilt insurance of EPFO ​​proves to be a lifeline for financially weak families in difficult times.

When a person who invests in the stock market retires, he always fears that if there is a recession in the market, his retirement fund will start decreasing rapidly and what will happen to his regular income. There is a complete solution to this in the EPF system which is called ‘Employees’ Pension Scheme’ (EPS-95).

Of the 12% contribution the company collects, 8.33% (maximum ₹1,250 per month at a statutory salary limit of ₹15,000) goes directly to the pension fund. If an employee has completed 10 years or more of continuous service in his entire career, he becomes entitled to receive a monthly pension for life after he completes the age of 58 years. After the death of a pensioner, his widow/widower gets family pension and children get child pension till the age of 25 years. This pension does not depend on the mood of the stock market, but is credited to the bank account on the first of every month as per the formula fixed by the government.

The sixth and most powerful aspect of EPF is its legal protection cover, about which 99 percent people are not aware. Under Section 10 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (Section 10 of the EPF Act) and Section 60 of the Civil Procedure Code (CPC), the amount deposited in the PF account has full legal protection.

This simply means that:

• Even if a person suffers huge losses in business, is declared bankrupt, or has outstanding bank loans worth crores of rupees, no court, income tax department or police of the country can attach, confiscate or freeze his PF money.

• Debt Recovery Tribunal (DRT) or any creditor cannot recover their dues from your PF balance.

On the contrary, if you have shares or cash in the stock market, mutual funds or a bank savings account, banks and recovery agencies can seize all those assets in one fell swoop in the event of a court order or bankruptcy. PF money is reserved only for the old age and maintenance of the employee and his dependent family.

The conclusion of this entire financial analysis is not at all that the stock market is bad. Equity and mutual fund SIPs are very important tools to beat inflation and create wealth in the long run. But wisdom lies in the right balance of both (Asset Allocation). EPF is the ‘strong and unbreakable foundation’ of your financial portfolio, while the stock markets are the ‘floors’ built on that foundation.

If you are making the mistake of reducing your PF contribution by chasing the glamor of the stock market, closing VPF or repeatedly withdrawing PF money while changing jobs and spending it, then you are playing with your future. The most ideal strategy is to contribute 12% of PF from your salary and let the company’s 12% matching fund grow quietly till the age of 58 in a disciplined manner. Apart from this, invest the extra monthly savings you have in index funds, large-cap or flexi-cap mutual funds through SIP. When you have a strong security blanket of 8.25% interest, tax-free returns and government guarantee in the form of EPF, only then will you be able to weather the ups and downs of the stock market without any panic and become truly financially independent and prosperous at the time of retirement.