Planning for retirement is not easy. Inflation can eat away at your Drawing Base. There are also dishonest brokers and bankers who are trying to missell PF account balance. This is combined with a tendency to invest in real estate and gold, which can lead to an unstable future. There is a silver lining in the two retirement vehicles that have been designated, the EPF (lowly) and the NPS (moderner). Both are constantly evolving with new options, features, investment and withdrawal flexibility.
Although the idea of EPF portability was dropped, you should think about how it can be used when planning for retirement.
Employee Provisional Fund (EPF
For paid employees, the only mandatory savings system is the monthly contribution to the Employees Provision Fund (EPF). Your monthly contribution to the Employees Provident Fund (EPF) is 12% of your primary income. You also receive a matching contribution by your employer. 8.33 percent of the employer’s contribution is deposited into a pension scheme called the Employee’s Retirement Scheme (EPS). The donation is not only tax-deductible under Section 80C but also the interest and money from superannuation.
Your earnings and your EPF payments will move in lockstep. Because the contribution is a percentage of the basic income, the outgo increases in lockstep with your earnings. This is important for building a substantial retirement plan. To get the best out of your EPF, here are some things to keep in mind.
- Open the account until retirement
EPF funds are often used by many people to pay short-term expenses. Recent changes to the withdrawal rules might have made it a bit easier. You can now withdraw part of your EPF funds for your child’s higher education, home down payment and marriage. However, there are some restrictions (see the table). The entire amount can be withdrawn if a member is unemployed for longer than two months.
- EPF fetches a higher rate than PPF and other avenues
Experts recommend waiting until retirement to make use of your EPF funds. Some flexibility is good for an emergency situation. The EPF’s core is to allow compounding to work its magic. The EPF’s core principle is to allow the corpus of the fund to grow each year through incremental contributions. This could have tremendous benefits in the long-term. If an individual has a base salary at Rs 15,000 and a retirement age of 30 years, they can build a savings of Rs 60.75 million by age 58.
If the accumulation phase is not completed, the compounding benefits over the years will be lost.
- Contribution to VPF
Some believe that the Voluntary Provident Fund should go beyond the 12 percent payment (VPF). VPF is an EPF extension which allows you to put more than the 12 percent limit and still receive the same tax benefits as the returns. The VPF has a Rs 1.5 lakh per annum investment limit, which is the same as the PPF. VPF interest rates are not subject to the 10-year government bond yields. The current interest rate at 8.65% is considerably higher than that offered by the PPF, which is 7.9%.
Increasing PF contributions will invariably result in lower take home pay. Experts believe that having less purchasing power today can be a benefit, since it could lead to greater financial stability in the future.
- A account that offers jobs on rollover
While you are changing jobs, transfer your balance PF fund to your new employer. It is strictly forbidden to withdraw the entire amount. If the money isn’t transferred or withdrawn, there are many disadvantages. It may increase your tax liability. The account earns interest even after you leave your job. The interest component of the account is taxable even if you don’t take any money out.
Additionally, the five-year continuous tax exemption provision for tax exemption is reset to the account’s beginning date if the balance is not transferred.
