It isn’t easy to plan for retirement. Then there’s inflation, which eats away at your money. Then there are the dishonest bankers and brokers that are out to missell inappropriate products. When you combine this with a bias to invest in traditional assets such as gold and real estate, you have the makings of an unstable future. The silver lining is the two designated retirement vehicles, the lowly EPF and the more modern NPS. Both are evolving, with new features, options, and investment and withdrawal flexibility being added.
Though the concept of allowing EPF portability has been scrapped, think about how you can use it when preparing for your retirement.
Employee Provident Fund (EPF)
The monthly contribution to the Employees Provident Fund (EPF) is the only compulsory savings system for paid individuals. Every month, 12% of your primary income is deposited into your EPF account, along with a matching contribution from your employer. 8.33 per cent of the employer’s contribution goes into a pension vehicle called the Employee’s Pension Scheme (EPS). Not only is the donation tax-deductible under Section 80C, but so are the interest and money received from superannuation.
The EPF ensures that your payments advance in lockstep with your earnings. The outgo rises in lockstep with your income because the contribution is a predetermined percentage of the basics. This aspect is crucial for accumulating a sizable retirement planning. However, to get the most out of the EPF, keep the following considerations in mind:
- Keep the account open till retirement
Many people use their EPF funds to cover short-term expenses. Recent revisions to withdrawal rules may have made things a little easier. Partially early withdrawals from EPF are now permitted for a child’s marriage, higher education, and home down payment, subject to certain restrictions (see table). If a member has been unemployed for more than two months, they can withdraw the entire sum.
- EPF now fetches a much higher rate relative to PPF and other avenues
While some flexibility can benefit a genuine emergency, experts advise waiting until retirement to use your EPF funds. Allowing compounding to work its magic is the core of the EPF. Allowing the corpus to grow year after year with incremental contributions might produce tremendous advantages in the long run. For example, assuming a 5% annual increase in assistance, an individual with a base salary of Rs 15,000 and 30 years till retirement can accumulate a corpus of Rs 60.75 lakh at 58.
The compounding benefits earned over the years are lost if the corpus is partially taken during the accumulation phase.
- Increase contribution through VPF
Some argue that the Voluntary Provident Fund should be expanded beyond the mandatory 12 per cent payment (VPF). The VPF is an EPF extension that allows you to invest above the 12 per cent limit while still receiving the same tax benefits and returns. The VPF does not have the same investment ceiling as the PPF, Rs 1.5 lakh per year. Furthermore, unlike PPF returns, which fluctuate according to 10-year government bond yields, VPF interest rates are the same as EPF. The current interest rate of 8.65% is significantly greater than the 7.9% offered by the PPF.
Increasing PF contributions will inevitably result in lower take-home pay. Experts argue that having a bit less purchasing power today is beneficial, as it may lead to more financial stability later.
- An account with jobs on rollover
Transfer your previous PF fund balance to your new employer while changing jobs. Withdrawing the entire balance is strictly prohibited. There are various disadvantages if the money is not transferred or withdrawn and is left inactive. To begin with, it may increase your tax liability. Even when you quit your job, the account continues to earn interest until you retire and become inactive. Even if you do not take money from the account, the interest component becomes taxable.
In addition, if the balance is not transferred, the five-year continuous service provision for tax exemption is reset to the new account’s start date.