The EPF corpus will help in your post-retirement life and for any emergency or special situation
Every individual wants sufficient savings to have a secure retirement phase. However, this requires awareness and a strategic financial plan. To help with retirement savings the government of India initiated the Employee Provident Fund (EPF) Act in 1952. This retirement scheme enables salaried individuals by saving a portion of their salary every month and giving them a corpus of savings for retirement and other emergencies, during their lifetime. Additionally, all the deposits made into the EPF account earn interest every month; the rates for which are decided by the Central Board of Trustees (CBT) and the Employee Provident Fund Organisation (EPFO) before the beginning of a new financial year.
It is important to be aware that the EPFO recently announced an increment in the interest rate on EPF deposits to 8.65% for the FY 2018-19, a 10 basis points increase from 8.55% for FY 17-18.
This rise in interest can increase an individual's PF savings. But before you go deeper into the numbers, here is an overview of the EPF scheme and how it works.
How is money added to your EPF account
Employee contribution to EPF - 12% of basic salary (plus dearness allowance, if any)
Employer contribution to EPF - 3.67% of basic salary (plus dearness allowance, if any)
Employer contribution to EPS (Employee Pension Scheme) - 8.33% of basic salary (plus dearness allowance, if any)
Further, all these funds generated in the EPF scheme from all enrolled employees are collected together and invested by the EPFO across government bonds, corporate bonds, equities, and short-term debt. These funds then generate interest and get added to the employee's EPF corpus. The interest rate varies every year and is fixed by CBT in consultation with the finance ministry.
When can you withdraw from EPF account
There is a regulation attached to withdrawals. An individual cannot withdraw from an EPF account unless they have been unemployed for at least two months at the time of submitting the withdrawal application. It is often suggested that individuals shouldn't withdraw from an EPF account unless absolutely necessary as EPF offer risk-free gains that go a long way in giving a secure retirement life.
Advantages and benefits of EPF
This not only helps salaried individuals build up a corpus of savings for a secure retirement, but also has multiple tax benefits attached to it-
- Contributions to EPF scheme are eligible for tax deduction under section 80C
- As per section 10(11) and 10(12) of the Income Tax Act, Employer' contribution is tax exempt
- Interest earned on EPF savings are also tax exempt
- There is zero tax on maturity amount
Calculation of EPF interest for 2018-19
Interest on EPF is calculated every month, but deposits only take place at the end of the financial year. Shared below is a simple interest calculation on EPF of an employee.
Basic + DA = Rs 10,000
Employee contribution = 12 % of 10,000 =Rs 1,200
Employer contribution = 3.67% of 10,000 = Rs 367
Total monthly EPF contribution = Rs 1,567
Monthly interest for FY 2018-19 = 8.65/12 = 0.721%
If an employee started service on April 1, 2019, his/her contributions for the FY 2019-2020 start from April.
Interest calculations
PF Deposit in April = Rs 1,567
Interest generated in April = Rs 0 (no interest for first month)
PF Balance (End of April) = Rs 1,567
PF Deposit in May = Rs 1,567
Total PF Deposit (April + May) =Rs 3,134
Interest generated in May = Rs 3134 * 0.721% = Rs 22.6
Interest will be calculated in the same way every month, and will be deposited only at the end of the financial year, that is, March 2020.
EPF is one of the easiest and safest investments to secure your future. Most employers automatically start a PF account for their employees. All you have to do is continue working till your monthly contributions create a nice sizable bulk of money, which will help you after your retirement years or for any emergency/special situations in life.
FOR THE FUTURE
- EPF not only helps salaried individuals build up a corpus of savings for a secure retirement, but also has multiple tax benefits attached to it
- An individual cannot withdraw from an EPF account unless they have been unemployed for at least two months at the time of submitting the withdrawal
The writer is marketing head, Zeta
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "EPF")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}