Employee Provident Fund: A low-risk instrument for retirement planning

Applicability of EPF

Any non-public or public sector worker with a month-to-month wage lower than or equal to ₹15,000 can avail the advantages of the scheme. Employers may voluntarily supply the scheme to workers whose month-to-month wage exceeds ₹15,000. Any group with greater than 20 workers has to mandatorily prolong the advantages of the EPF scheme to its employees.

EPF contribution by employer and worker

Eligible people contribute as much as 12% of their month-to-month primary wage plus dearness allowance, in direction of the EPF scheme. The employer matches this contribution each month and these contributions stay invested and develop in worth until the person retires. At the time of retirement the particular person receives the full amassed contribution in addition to curiosity earned.

“The complete contribution of 12% made by the worker is invested within the EPF scheme, nonetheless solely 3.67% of the employer’s contribution goes in direction of the EPF. The steadiness 8.33% of the employer’s contribution goes to the Employee Pension Scheme (EPS). Some people can also decide to contribute greater than 12% of primary pay to the EPF scheme. This is known as the Voluntary Provident Fund or VPF. However in VPF, the employer doesn’t should match the worker’s contribution”, explains Suresh Sadagopan, Investment Advisor and Founder of Ladder7 Financial Advisories.

For sure specified circumstances the contribution might be lower than 12% of wage. For instance in organizations with lower than 20 workers, the contribution fee for each worker and the employer is 10%. For ladies within the first 3 years of employment, the contribution might be as much as 8% of the wage. Such lowered limits encourage extra folks to speculate by way of EPF.

Advantages of investing in EPF

The assured return in EPF is without doubt one of the greatest causes buyers like this scheme. As of in the present day, the rate of interest for EPF investments is 8.5% each year. This curiosity is calculated on a month-to-month foundation, and transferred to the buyers. EPF account on a yearly foundation on thirty first March of the relevant monetary 12 months.

Combined with the assured curiosity, the truth that the EPF scheme is unrelated to the fairness markets helps buyers diversify their investments and scale back dangers.

Earlier EPF contributions fell within the Exempt Exempt Exempt (EEE) class. That means the month-to-month contributions, curiosity earned and quantity withdrawn on maturity have been all exempt from tax. “However from April 2020, the employer’s contribution to the EPF account can turn into taxable if it exceeds ₹7.5 lakh in a monetary 12 months. Effective from 1st April, 2021, if an worker’s personal contribution to the EPF account together with extra contribution through Voluntary Provident Fund (VPF) exceeds ₹2.5 lakh in a monetary 12 months, then the curiosity earned on extra contributions will probably be taxable within the arms of the worker”, ays Sadagopan.

Withdrawal from the EPF scheme

The amassed quantity below the EPF scheme might be withdrawn utterly when the investor attains the age of 58 years (that’s, on retirement). In case of the demise of the investor, the household may withdraw the amassed corpus. Prior to turning 58 years, an investor can withdraw all the corpus solely within the following conditions –

On being unemployed for greater than 2 months. An investor who loses his/her job can withdraw 75% of EPF corpus after one month of unemployment, and if nonetheless unemployed for two months withdraw the steadiness 25%. An worker may withdraw whereas switching jobs (length with out a job ought to be greater than two months) or if he/she is shifting into the casual sector or self-employment which isn’t counted as employment below EPF.

One 12 months earlier than retirement, the investor can withdraw as much as 90% of the corpus. However the investor ought to be of no less than 54 years of age to be eligible for this withdrawal. Partial withdrawal of the EPF corpus is permitted for sure bills comparable to wedding ceremony, larger schooling, medical emergencies, buy of land, building/restore of a home and compensation of a house mortgage.

EPF Account and UAN

An investor can observe the EPF investments by way of their EPF account. The EPF account might be accessed by way of the EPFO E-Sewa portal, Umang app or SMS and missed name facility with the assistance of the Universal Account Number (UAN). The UAN stays fixed by way of the lifetime of the investor and is useful on the time of withdrawal or steadiness switch.

“Keeping in thoughts all of the options of the EPF scheme, salaried Indians can drastically profit from this funding possibility. The EPF is a low-risk funding avenue that helps buyers construct their retirement corpus or just helps fairness buyers diversify their portfolio by including a set earnings element. The key to profiting from the EPF is to stay invested till retirement and regulalary contribute 12% of the fundamental wage in direction of the EPF scheme”, Sadagopan says.

In truth, in comparison with financial institution deposits and different Small Savings Schemes just like the National Savings Certificate and Public Provident Fund, the EPF supplies the next curiosity at 8.5% each year and supplies tax advantages as properly, thus making it a terrific possibility for salaried buyers.

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