The Employer 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 fixed returns and the taxability feature also make it an attractive option to invest in. However, a lot of us tend to ignore these benefits and treat the Employee Provident Fund in an indifferent manner. Investing in Employee Provident Fund can be a very beneficial investment decision if we understand some essential factors and follow simple principles. Some of these basic principles are listed below –
Do Not opt-out
The fixed monthly contribution is the core of Employee Provident Fund investment. The fund is built up by the regular monthly investment which is 12% of the basic salary of the individual. The employer too has to contribute the same amount towards Employee Provident Fund as their share. In some organizations the employees get an option not to contribute for the Employee Provident Fund whereas the Employer’s contribution would be mandatory. On the other hand, there is a Voluntary Employee Provident Fund option which allows them to contribute more than 12% of the basic salary to ensure higher corpus in future, but the employer’s contribution cannot exceed the pre-determined level of 12% of the basic salary. One should contribute at least the minimum investment amount towards it. By investing in Employee Provident Fund, we can avail benefits under section 80C of the Income Tax laws.
Wait until retirement
The Employee 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 15000 and 30 years left for retirement, can attain a corpus of Rs 1.72 crores at the time of retirement. The power of compounding plays a major role in accumulating such huge returns. Employee Provident Fund, if properly utilized can solve half the problem of the post retirement fund requirement
Do not treat it as a surplus
A few of us consider Employee Provident Fund as an alternative surplus amount to be used to fulfill certain short term goals. Sometimes they are treated as an emergency fund. It would be prudent not to treat Employee Provident Fund as an additional surplus and leave it alone only for the retirement goal. There is an option to avail a loan on our Employee Provident Fund amount in our 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 that looks very tempting to withdraw from the Employee 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 our PF account.
Rollover 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 organization. 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 an PF account which has been kept idle. The Employee Provident Fund account transfer, if not done within 3 years of leaving the organizations becomes difficult and a tedious procedure to follow. One should ensure that the accounts are rolled over and clubbed with the new account to ensure proper capital appreciation.
Apply for a Universal PF account number
The salaried professionals who have worked in multiple organizations go through the trouble of transferring and managing multiple accounts belonging to their older companies. To tackle that tricky situation the EPFO (Employee’s Employee Provident Fund Organization) is now providing a Unique Account Number (UAN) where multiple accounts can be managed through single portal. The scheme was launched in the month of October 2014.It is advisable for all the working professionals to obtain their UAN’s to ensure convenient management of their PF accounts.
EPF 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 we receive 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 fulfilment of the retirement goal.