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People often believe that investing in the stock market brings more income, while EPF, i.e., Employee Provident Fund, is considered a safe but low-return option. But recently, a Chartered Accountant (CA) has said that in certain circumstances, EPF can prove to be more beneficial than shares. Yes, PF with only 8.25% annual interest can also surpass the investment that is giving a return of 12% to 15%. It may sound strange, 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…who got what
Chartered Accountant Nitesh Budhdev has told the story of two employees, how much profit can be made from which investment option. The annual salary of both is ₹26 lakh, while their basic salary is ₹1 lakh per month. Both started their job after 1 September 2014. Such employees can also choose not to invest in EPF.

The first employee deposits ₹12,000 from his salary every month in the EPF account. The company, i.e., the employer, also deposits the same amount. That is, a total of ₹24,000 is deposited in the PF account every month. Since the basic salary of this employee is more than ₹15,000 and he started working after 2014, his entire contribution goes to EPF and not to the pension scheme (EPS). After five years, about ₹17.75 lakh has been deposited in the PF account of this employee, and this entire amount is tax-free.

What happened to the employee who invested in the stock market?

Now let's talk about the second employee, who refused to put money in EPF and started investing the entire ₹24,000 directly in the stock market every month. But there is one thing to understand here. The ₹12,000 that the company used to deposit in PF earlier will now be directly added to his salary, and tax will have to be paid on it. Suppose the employee is in the 30% tax slab, then he will have to pay tax of about ₹3,744 on it. That means now he will have only ₹20,256 left for investment instead of ₹24,000.

Why did it lag behind PF despite an 11% return in shares?

Suppose another employee gets an annual return of 11% on his share investment. But even after five years, his total money amounts to about ₹15.75 lakh, and he has to pay some tax on it. On the other hand, even if the employee investing in PF gets only 8.25% annual interest, after five years, his PF balance reaches ₹17.75 lakh, and that too the entire amount is tax-free. This means that despite getting fewer returns, an employee with PF earns more than an employee investing in the stock market.

Why is PF ahead of the stock market?

The government has given EEE (Exempt-Exempt-Exempt) tax status to EPF. This means that when you invest money in EPF, there is no tax on it. The interest received throughout the year is also completely tax-free. And when you withdraw your money, you are still completely tax-free, provided you have worked for at least five years.

On the contrary, long-term capital gain tax is applicable to the earnings from the stock market. If your earnings are more than a year old and are above ₹ 1 lakh, then 12.5% ​​tax has to be paid on them. How much return is required in shares to beat PF? According to chartered accountant Nitesh Budhdev, if the second employee invests ₹20,256 every month, he will have to earn around 16% annual return (after tax deduction) to get ₹17.75 lakh in five years. And achieving this return is not that easy.

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