The Employees' Provident Fund plays a very important role in building up the corpus to be used during the post-retirement phase of one's life. It is by far the easiest way to invest. The features of fixed returns and taxability also make it an attractive option for investing.
However, many of us tend to ignore these benefits and treat the EPF in an indifferent manner. Investing in Employees' Provident Fund can be a very beneficial investment decision if one understands some essential factors and follows simple principles.
Explained below are some of these basic principles:
1. Don't opt out
The fixed monthly contribution is the core of provident fund investment. The fund is built up by the regular monthly investment, which is 12 per cent of the basic salary of the individual. The employer too has to contribute the same amount towards Employees' Provident Fund as its share. In some organisations, the employees get an option not to contribute for the fund whereas the employer's contribution would be mandatory. On the other hand, there is a Voluntary Employees' Provident Fund option, which allows them to contribute more than 12 per cent of the basic salary to ensure a higher corpus in future, but the employer's contribution cannot exceed the pre-determined level of 12 per cent of the basic salary. One should contribute at least the minimum investment amount towards it. By investing in Employees' Provident Fund, you can avail benefits under Section 80C of the Income Tax laws.
2. Wait until retirement
The Employees' Provident Fund schemes are specifically made to attain financial security during post-retirement life. They have strict withdrawal and taxation rules which make the fund a suitable option to invest. The corpus, if allowed to build up along with the incremental contribution after each year, can reap very high benefits in the long run. A salaried employee with basic salary of Rs 15,000 and 30 years left for retirement can attain a corpus of Rs 1.72 crore at the time of retirement. The power of compounding plays a major role in accumulating such huge returns. If properly utilized, the EPF can solve half the problems of fund requirement after retirement.
3. Don't treat it as a surplus
The Employees' Provident Fund is considered by many as an alternative surplus amount to be used to fulfill certain short-term goals. Sometimes it is treated as an emergency fund. It would be prudent not to treat the fund as an additional surplus and leave it alone only for the retirement goal.
There is an option to avail a loan on the Employees' Provident Fund amount in one's account, which is used by a lot of investors as the loan rates are lesser than the rates offered by the banks for personal loans. Typically, these loans are availed to meet short-term financial needs like marriage, construction of a house or any medical emergency. Although being a reserve it looks very tempting to withdraw from the Employees' Provident Fund, the long-term impact of making such decisions should be considered before opting for such a loan. For goals other than retirement, there are avenues which can fulfill the investment requirement and are more feasible options than withdrawing from the PF account.
4. Roll over the account during job change
In case of an individual who has worked with more than one employer, the employee has the option to transfer the balance in the previous company's PF account to the account belonging to the new organisation. In case if the amount is not transferred and kept idle it tends to get ignored and eventually forgotten by most of them. Moreover, the interest is accrued only for three years in a PF account which has been kept idle. If not done within 3 years of leaving the organization, EPF account transfer becomes a difficult and tedious procedure to follow. One should ensure that the accounts are rolled over and clubbed with the new account to ensure proper capital appreciation.
5. Apply for a universal PF account number
Salaried professionals who have worked in multiple organisations go through the trouble of transferring and managing multiple accounts belonging to their older companies. To tackle that tricky situation, the Employees' Provident Fund Organisation (EPFO) is now providing a Unique Account Number (UAN) where multiple accounts can be managed through a single portal. The scheme was launched in October 2014. It is advisable for all working professionals to obtain their UAN's to ensure convenient management of their PF accounts.
CONCLUSION
Provident fund is a very strong investment tool as part of retirement planning. However, one should not rely totally on the EPF as due to fixed returns, it does not allow you to reap the benefits of the long-term growth in the market. Also, the corpus which one receives at the time of retirement may not be sufficient totally for the post-retirement life, considering medical inflation. Other investment options should be explored to ensure complete fulfillment of the retirement goal.
ArthaYantra.com provides personal financial advice online.
Disclaimer: The opinions expressed in this article are the personal opinions of the author. NDTV Profit is not responsible for the accuracy, completeness, suitability, or validity of any information on this article.
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