A low-risk instrument for retirement planning


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Applicability of EPF

Any employee in the private or public sector whose monthly salary is less than or equal to ₹15,000 people can benefit from the benefits of the scheme. Employers can also voluntarily offer the scheme to employees whose monthly salary exceeds ₹15,000. Any organization with more than 20 employees must extend the benefits of the EPF scheme to its staff.

EPF contribution per employer and employee

Eligible people contribute up to 12% of their monthly base salary, plus the cost allowance, to the EPF scheme. The employer pays this contribution each month and these contributions remain invested and increase in value until the individual retires. At the time of retirement, the person receives the total accumulated contribution as well as the interest earned.

“The entire 12% contribution paid by the employee is invested in the EPF scheme, but only 3.67% of the employer’s contribution goes to the EPF. The balance 8.33% of the employer’s contribution goes into the Employees’ Pension Scheme (EPS). Some people may also choose to contribute more than 12% of the base salary to the EPF scheme. This is called the Voluntary Provident Fund or VPF. However, in VPF, the employer does not have to match the employee’s contribution, ”says Suresh Sadagopan, investment advisor and founder of Ladder7 Financial Advisors.

For certain specific cases, the contribution may be less than 12% of the salary. For example, in organizations with less than 20 employees, the contribution rate for both employee and employer is 10%. For women in the first 3 years of employment, the contribution can go up to 8% of the salary. These reduced limits encourage more people to invest through EPF.

Benefits of investing in EPF

The guaranteed return of the EPF is one of the main reasons why investors love this program. To date, the interest rate for EPF investments is 8.5% per year. This interest is calculated monthly and transferred to investors. EPF account on an annual basis as of March 31 of the financial year concerned.

Combined with the guaranteed interest, the fact that the EPF scheme is not linked to the equity markets helps investors to diversify their investments and reduce risk.

Contributions prior to EPF fell under the Exempt Exempt Exempt (EEE) category. This meant that monthly contributions, interest earned, and the amount withdrawn at maturity were all tax-free. “However from April 2020, the employer’s contribution to the EPF account may become taxable if it exceeds ₹7.5 lakh in a financial year. From April 1, 2021, if an employee’s own contribution to the EPF account as well as the excess contribution via the Voluntary Provident Fund (VPF) exceeds ₹2.5 lakh in a fiscal year, then interest earned on excess contributions will be taxable in the hands of the employee, ”Sadagopan said.

Withdrawal from the EPF scheme

The amount accumulated under the EPF scheme can be fully withdrawn when the investor reaches the age of 58 (i.e. upon retirement). In the event of the investor’s death, the family can also withdraw the accumulated corpus. Before turning 58, an investor can only withdraw the entire corpus in the following situations –

Be unemployed for more than 2 months. An investor who loses his job can withdraw 75% of the EPF corpus after one month of unemployment, and if he is still unemployed for 2 months withdraw the balance 25%. An employee can also withdraw if he changes jobs (the jobless period must be greater than two months) or if he goes to the informal sector or self-employment which is not counted as a job in the framework of the EPF.

One year before retirement, the investor can withdraw up to 90% of the corpus. However, the investor must be at least 54 years old to be eligible for this withdrawal. Partial withdrawal from the EPF corpus is authorized for certain expenses such as marriage, higher education, medical emergencies, the purchase of land, the construction / repair of a house and the repayment of a mortgage.

EPF and UAN account

An investor can follow EPF investments via his EPF account. The EPF account can be accessed via the EPFO ​​E-Sewa portal, the Umang app or the SMS and missed calls function using the universal account number (UAN). The UAN remains constant throughout the life of the investor and is useful at the time of withdrawal or balance transfer.

“Keeping in mind all the characteristics of the EPF scheme, salaried Indians can greatly benefit from this investment option. EPF is a low-risk investment avenue that helps investors build their retirement corpus or simply helps equity investors diversify their portfolios by adding a fixed income component. The key to getting the most out of the EPF is to stay invested until retirement and normally contribute 12% of base salary to the EPF scheme, ”says Sadagopan.

In fact, compared to bank deposits and other small savings plans like National Savings Certificate and Public Provident Fund, EPF offers higher interest at 8.5% per annum and also offers tax benefits, making it a great option for employee investors.

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