We normally hate any kind of deductions in our monthly salary slips – either its income tax deduction , professional tax deduction or even an EPF deduction.Very few of us really know that this small EPF deduction each year can in reality make you a crorepati by the time you retire. Encouraging fact is that this statement is applicable to even with those having modest salaries. There’s many if’s and but’s to achieve that , most notably being resisting the temptation to withdraw money till retirement.
12% of your basic salary that gets deducted as part of EPF account every month has a potential to make you a crorepati by the time you retire. Most of us are of view that investment is so small and interest rate offered is nothing special. Power of compounding clubbed with a matching contribution from your employer every month can do wonders for you.
Encouraging stats : 8.5% interest earned on the EPF can help a person with a basic salary of 25,000 a month accumulate a mammoth 2.4 crore in 35 years. Sounds unbelievable.
Good news is that the initial draft of Direct Tax Code has proposed that new contribution to EPF be taxed on withdrawal. However , the revised draft has made EPF fully tax exempt making it once again one of the best debt option available in the market.
Try not to touch your EPF account till you hang your boots. You may have to use it during acute emergencies but other than that avoid poking into this account while you are working. Its not uncommon of people to withdraw their PF at the stage. Government discourages you to withdraw money as withdrawals from EPF within five years of joining are taxable. Early withdrawal don’t allow power of compounding to come to play.
Lesson for everyone - Do not withdraw money from EPF while switching jobs , one should transfer the balance to the new account with the new employer. Remember , this do not happen automatically. You need to fill a ‘Form 13' and deposit it with the EPFO. Make this one of your first TODO’s things at new workplace as with course of time you will loose track of it and also get pre-occupied at new job.
EPFO in addition is coming up with a software enabling online transfer of money from old account to new account. This will reduce both the paperwork and time taken for transaction.
Positives of EPF :
Guaranteed returns :EPF is one of the safest debt instruments. Safety of principal and interest earned is very much there. Besides bring discipline in investing , it serves well to accumulate a corpus for retirement.
Interest rate fixed by government – The rate of interest on PF account is fixed eveny year during start of financial year by the government of India. The interest is for sure guaranteed and risk – free. The interest is credited to the members account on monthly running balance with effect from the last day in each year. The rate of interest is 9.5% for the year 2010-11 as notified by the Government. Out of 12% (or 10% as the case may be) of the employer’s share of contribution, 8.33% is to be remitted towards pension fund.
VPF option : In addition if you fund your debt portion lagging in your portfolio , you can add more through voluntary increases in your contribution (VPF).
Do not Forget Loans Options against EPF -Your EPF balance can be used as a security for getting loans and thus makes your case strong for sanction of loan. Of course , it can also be utilized during acute emergency.
What if you do not withdraw and do not transfer ? – Earlier keeping money in old EPF account was not much of a disadvantage as the amount continued to earn interest till time of withdrawal. But from April 2011 , accounts which are inactive for more than 3 years will stop earning interest. So there’s a distinct disadvantage here apart from the fact that keeping multiple accounts can be a big pain. If accounts are located in different cities , it makes process more cumbersome. Also a single account gives you a better idea of your current corpus.
Once social security number which is currently being worked upon comes into picture , EPF accounts will be portable. So in such a scenario there will be no need to switch funds. The new employer will make all contribution to this account and completely independent of workplace.
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