Creating a retirement kitty requires committing to long-term investment plans in order to generate wealth for your golden years. One of your investment options is the Employees’ Provident Fund (EPF), investment to which is mandatory for most salaried employees.
All salaried individuals mandated by the government rules are expected to contribute 12% of their basic salary to their EPF account and their employers must contribute another 12%. The idea behind EPF is to encourage people to save and financially secure their retirement. EPF is mandatory for the employees of all public, private and government sector entities with 20 or more employees.
The interest rate on EPF investment for 2019-20 is 8.5%, which is higher than other debt investment returns such as PPF, which currently offers 7.1%. Investment in EPF not only provides higher returns but the contributions are also eligible for tax deduction benefits under Section 80C. The interest earned and the final accumulated amount are both tax-free in retirement.
Here are three tips for maximising your EPF benefits.
Use VPF To Boost Your Savings
Voluntary Provident Fund (VPF) is an extension of the provident fund but is not mandatory. It provides PF subscribers with an option to contribute funds over and above the threshold of 12%. You can voluntarily invest additional funds up to 100% of your basic salary and dearness allowance (DA) in your VPF account. The money saved as VPF is maintained in a separate account but is treated as an EPF account with the same benefits. The contribution to VPS is voluntarily; however, you can consider stepping up your contribution with every salary increment, or whenever possible, to build your nest egg. Do decide on the amount after factoring in your income, age and portfolio exposure. There should be a healthy blend of all the investment instruments in your portfolio to get the best results.
When Changing Jobs, Don’t Redeem PF
When switching jobs, many people redeem their PF savings from the organisation they are leaving. You should ideally not withdraw your provident fund unless until there is a pressing need. For instance, withdrawing your PF to make a car upgrade is not financially advisable because you’re letting go of substantial future gains in order to buy a depreciating asset. But using it to pay off your debts when there is a loss of income makes sense. Whenever you switch jobs, your new employer opens a new PF account for you. You should ideally get the PF from your old organisation transferred to the new one. If you have left your job for a sabbatical or have become self-employed or joined an organisation which is not covered under the EPF rules, you can consider withdrawing the amount. In such a case, you are considered not employed under the EPF rules. This is an important step as not withdrawing it may increase your tax liability. Your PF account continues to earn interest if not transferred as it becomes inoperative, and then becomes taxable if not withdrawn from the account in a timely manner. If the PF balance is not transferred to your new account, the tax exemption clause for the five-year qualifying period is reset to the new account starting date. For instance, you leave a company after two years of service and join another company, which you leave after 5 years of service, but you don’t merge the two PF accounts. In this case, if you become self-employed, your 7 years of service will not be counted, and the withdrawal may attract taxes.
Do No Dip Into Your PF Corpus For Your Short-Term Needs
In a bid to provide funds in the hands of the people during any financial crisis, the government has made PF withdrawals easier. However, before you use it for any financial need, do ask yourself if there is any other way to bridge your liquidity gap. After all, do you want to touch your retirement kitty? PF rules allow partial withdrawals for situations like a house down payment, child’s marriage etc. and withdrawal of the entire fund if you are unemployed for two months. So you should first weigh the need for the PF corpus and then decide if you want to tap into it. Moreover, do remember that a sudden break in PF accumulation would reduce the compounding benefits you would enjoy in future.
With a rise in income, your contribution to your EPF kitty also increases, bolstering your retirement fund. However, you should remain invested in it and exercise caution while withdrawing from the fund. Besides being a great investment option, EPF also comes as a low-cost borrowing option when you need liquidity.
The writer is CEO, BankBazaar.com