To elaborate, unlike many long term investment schemes, the corpus that you get from EPF at your retirement or while leaving your company is absolutely tax-free. Which makes it stand apart in the line of investment instruments that otherwise may look attractive owing to higher interest offerings.
To quote an example here: Imagine Rajesh invests 2 lac in a year in a smart long term investment plan that fetches him a hefty 10% return, on the other hand, around 2 lac is deducted out of Era’s annual CTC and lands in her EPF account at 8.65% interest rate. At the end of the year, Rajesh earns 20,000, while ERA earns about 17,300 interest. However, whenever Rajesh is going to reap this return on investment, it will be liable for 30% Income Tax (assuming Rajesh falls in the >10 lac tax slab). Thereby the actual return on investment he’ll earn after tax deduction will be 14,000 (20,000 – 6,000 Tax).
Now imagine this tax saving year on year, and add it up to the years you’ll be retiring in.
Furthermore, the power of compounding plays a big role in long term savings like Employees Provident Fund. Moving ahead with the above example, if ERA puts 2 lac this year in her EPF, then the opening balance the next year will be 2,17,300, on which the interest will be calculated the next year in addition to another consolidated sum towards EPF. Interest on interest earned, and the cycle magnificently goes on.
A prudent investor has a mixed portfolio, which comprises of long term and short term investments, besides keeping liquid cashflow. The risk acumen though differs from person to person and is the basis of investment instruments one chooses to grow his/her money. However, all being said, Employees Provident Fund is one such investment tool that should be a part of your investment portfolio and retirement planning.