One of the traditional and more safest investment or saving habits in India is monthly contribution for the Employee Provident Fund (EPF). Still many of us not aware of the advantages on EPF contribution and how it is superior when compare to the other safe investments. If you are looking for the retirement planning, have the continuous contribution towards the EPF is the way to go. This will show the power of compounding on the long run. This article explores the few important facts about the EPF and how you can do the perfect retirement planning using the EPF contribution. If you have any thoughts, please post it in the comments section. Subscribe to our future articles here.
High Interest Rates
It is one of the main reason why EPF is the best investment option compare to the other debt instruments like Fixed Deposit, PPF, NSC, etc. Provident Fund Commission offers 9.5% p.a. as the returns for your savings on the EPF account. This is compounded monthly which never offered in any other investment portfolios. The effective rate of return will be much higher in the log run. The following is the table lists interest rates of the other debt instruments:
Voluntary Contribution to EPF
It is commonly allowed by the companies and govt. institutions to increase the amount destructed for the EPF. It is compulsory for the salaried person to give 12% of the basic into the EPF. Apart from that employee can increase his contribution towards EPF up to 100% of basic salary and Dearness Allowance. Company is obliged to contribute 12% of the basic salary to your EPF account. Which is added bonus of the employee because at the end money goes to employee.
If you don’t have any expenses and commitment to pay EMI, etc, it is good idea to increase the EPF contribution. Note that surely it is better investment than any other debt instruments for the long run. It will be very good for the retirement planning. The amount excess of Rs.100000 will not be eligible for the tax exemption. See the next section for details.
Tax Exemption of EPF
The contribution towards EPF is coming under the section 80c of the Income Tax exception. As we know, Rs.100000 is shown under the section 80c of the Income Tax act, EPF also comes under this section. You can add the total yearly contribution towards EPF, if it is less than Rs.100000 remaining amount you must plan for the other tax saving investments.
There is no tax for the interest income on EPF and when receiving the lump sum amount after the retirement. But, other debt instruments like fixed deposits attract the TDS towards the interest income. Note that, if you are withdrawing money within five years, the amount will be taxable.
Retirement Planning using EPF
Undoubtedly, EPF is one of the good avenue for planning the retirement. If you are salaried person working for more than 20 years for a company, you must plan your retirement using the EPF. You don’t take any loans or withdraw for any other purposes. It will compound and will make the huge amount which can be utilized for investing in the retirement scheme.
Calculating the current inflation scenario and lifestyle, it wouldn’t be enough to run your life with the pension amount. You must have the retirement corpus to run the happy life. There are many schemes available with the insurance companies to provided the monthly income. Pay the EPF amount and receive monthly income after the retirement.
Advantages of Employee Provident Fund (EPF)
This section summarizes the important points about the EPF which you must remember to take decision on EPF.
- Interest rate is 9.5% p.a. which is higher than other debt investments.
- It is the long term investment. Don’t use EPF for the short term goals.
- You can take the loans from EPF amount instead of taking the personal loans.
- If you are switching the company, instead of closing you can transfer to the new employer.
- Employer needs to contribute 12% of basic salary to your EPF account.
- It is maintained by the govt. organization, so it enjoys the most safest investment.
- Tax exemption under section 80c
- There is no tax for the interest income and no TDS deducted at the time of retirement.
I hope this article would have been the eye opener to understand the power of EPF contribution. Please don’t take this as slightly, you will be worrying when time is gone. Most of the employed are not taking this as seriously, because it is very common in the scenario of switching the companies very often. If you have any thoughts, please post it in the comments section.
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