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A low-risk instrument for retirement planning

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Applicability of EPF

Any private or public sector employee with a monthly salary less than or equal to 15,000 can avail 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 has to mandatorily extend the benefits of the EPF scheme to its staff.

EPF contribution by employer and employee

Eligible individuals contribute up to 12% of their monthly basic salary plus dearness allowance, towards the EPF scheme. The employer matches this contribution every month and these contributions remain invested and grow in value till the individual retires. At the time of retirement the person receives the total accumulated contribution as well as interest earned.

“The entire contribution of 12% made by the employee is invested in the EPF scheme, however only 3.67% of the employer’s contribution goes towards the EPF. The balance 8.33% of the employer’s contribution goes to the Employee Pension Scheme (EPS). Some individuals may also opt to contribute more than 12% of basic pay 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”, explains Suresh Sadagopan, Investment Advisor and Founder of Ladder7 Financial Advisories.

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

Advantages of investing in EPF

The guaranteed return in EPF is one of the biggest reasons investors like this scheme. As of today, the interest rate for EPF investments is 8.5% per annum. This interest is calculated on a monthly basis, and transferred to the investors. EPF account on a yearly basis on 31st March of the applicable financial year.

Combined with the guaranteed interest, the fact that the EPF scheme is unrelated to the equity markets helps investors diversify their investments and reduce risks.

Earlier EPF contributions fell in the Exempt Exempt Exempt (EEE) category. That means the monthly contributions, interest earned and amount withdrawn on maturity were all exempt from tax. “However from April 2020, the employer’s contribution to the EPF account can become taxable if it exceeds 7.5 lakh in a financial year. Effective from 1st April, 2021, if an employee’s own contribution to the EPF account along with excess contribution via Voluntary Provident Fund (VPF) exceeds 2.5 lakh in a financial year, then the interest earned on excess contributions will be taxable in the hands of the employee”, ays Sadagopan.

Withdrawal from the EPF scheme

The accumulated amount under the EPF scheme can be withdrawn completely when the investor attains the age of 58 years (that is, on retirement). In case of the demise of the investor, the family can also withdraw the accumulated corpus. Prior to turning 58 years, an investor can withdraw the entire corpus only in the following situations –

On being unemployed for more than 2 months. An investor who loses his/her job can withdraw 75% of EPF corpus after one month of unemployment, and if still unemployed for 2 months withdraw the balance 25%. An employee can also withdraw while switching jobs (duration without a job should be more than two months) or if he/she is moving into the informal sector or self-employment which is not counted as employment under EPF.

One year before retirement, the investor can withdraw up to 90% of the corpus. However the investor should be of at least 54 years of age to be eligible for this withdrawal. Partial withdrawal of the EPF corpus is permitted for certain expenses such as wedding, higher education, medical emergencies, purchase of land, construction/repair of a house and repayment of a home loan.

EPF Account and UAN

An investor can track the EPF investments through their EPF account. The EPF account can be accessed through the EPFO E-Sewa portal, Umang app or SMS and missed call facility with the help of the Universal Account Number (UAN). The UAN remains constant through the lifetime of the investor and is helpful at the time of withdrawal or balance transfer.

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

In fact, compared to bank deposits and other Small Savings Schemes like the National Savings Certificate and Public Provident Fund, the EPF provides a higher interest at 8.5% per annum and provides tax benefits as well, thus making it a great option for salaried investors.

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