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In the absence of social security and adequate unemployment cover, this forced saving provides a huge benefit

Sample this: You start contributing Rs 1,000 per month (employee and employer’s contribution) into the employee provident fund (EPF) from your first job at 21. This contribution increases by 10 per cent every year and earns an average annual interest of eight per cent. If you retire at 60, the final corpus will be Rs 1.32 crore. If you were to become unemployed for six months after the first 10 years, you would have a balance of Rs 2.5 lakh as emergency fund.

One can claim this amount if unemployed for two months after quitting the job. Reports suggest the Employee Provident Fund Organisation (EPFO) has proposed sweeping changes that would include reduction of the compulsory 12 per cent for employees. The argument: This will bring in more people into the net because 12 per cent is a very high number that reduces the take-home pay of employees. This forces many to continue in the unorganised sector. On one hand, bringing in more people into the ambit of EPF is very good. But reducing the contribution to increase the take-home salary might not be the best solution. Madan Sabnavis, chief economist, CARE Ratings, said: “The government wants to enhance the spending ability of households and also reduce its interest burden.

But it is not a good idea because EPF is the only vehicle that provides decent returns on forced savings.” In the absence of products for unemployment or a proper social security system, EPF is an important vehicle. Experts also make another point that people, especially in the cities, are aggressively using credit cards to spend. According to Reserve Bank of India’s latest numbers, in 2013, there were 18.5 million cards and the total credit card transactions were Rs 13,639 crore. This translates into an average credit card spend of Rs 7,227.

Till October, the number of cards had increased to 19.95 million, whereas the total transaction amount had shot up to Rs 17,313 crore — an average card spend of Rs 8,700 — an increase of 20 per cent and not good at all for individuals. Say, if the limit is reduced and the employee in our example saves Rs 800 per month (instead of the earlier Rs 1,000 per month), growing at 10 per cent annually and earning an average interest rate of eight per cent, his corpus at 60 will be Rs 1.05 crore — a sharp drop of Rs 25 lakh. Financial planners are divided over the impact.

Some like Kartik Jhaveri of Transcend India say if the government uses other methods by giving more benefits to equity-linked savings schemes or schemes that will pay a higher rate of return to the investor and increases the limit of 80C to say, Rs 3 lakh. This will lead to forced savings in higher-returning instruments. Others like Gaurav Mashruwala say that one can tinker with the underlying instruments in EPF by including equity, gold, etc, and give the employee an option to choose. “But there shouldn’t be any reduction in the contribution,” adds Mashruwala.