The corpus, if allowed to build up along with the incremental contribution after each year, can reap very high benefits in the long run.
The Employees' Provident Fund (EPF), being an important part of one's salary, plays an essential role in building up a sufficient retirement corpus. Apart from being the easiest way to invest, the fixed returns and the taxability feature also make it an attractive option for investment.
Although a lot of people tend to ignore these benefits and treat EPF in an indifferent manner, but investing in EPF - according to experts -- can be a very beneficial investment decision if we understand some essential factors and follow some simple principles. Here they go:
The fixed monthly contribution is the core of the Employees' 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 the EPF as their share. In some organizations the employees get an option not to contribute for the EPF, 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. Whatever be the case, one should contribute at least the minimum investment amount towards it. By investing in the EPF, we can also avail tax benefits under Section 80C of the Income Tax laws," informs Nitin Vyakaranam, founder & CEO of ArthaYantra, an online financial planning firm.
Wait Until Retirement
The EPF 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. For instance, a salaried employee with a basic salary of Rs 15000 and 30 years left for retirement can attain a corpus of Rs 1.72 crore at the age of 60. The power of compounding plays a major role in accumulating such huge returns. The EPF, if properly utilized, can even solve half of the problems of the post retirement fund requirement.
Do Not Treat It As a Surplus
A few of us consider EPF 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 EPF as an additional surplus and leave it alone only for the retirement goal. There is an option to avail a loan on the Employee Provident Fund amount in one's account, which is used by a lot of investors as the loan rates are lesser than the rates offered by banks for personal loans.
"Typically these loans are availed to meet the short-term financial needs like marriage, construction of a house or any medical emergency. Although being a reserve it looks very tempting to withdraw from the Employees' Provident Fund or borrow, the long-term impact of making such decisions should be considered while taking such a decision. 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," says Vyakaranam.
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 the amount is not transferred and is kept idle, it tends to get ignored and eventually forgotten by most of them. Moreover, the interest is accrued only for three years in a PF account which has been kept idle. The EPF account transfer, if not done within 3 years after leaving the organizations, becomes difficult and a tedious procedure to follow. Therefore, 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 this tricky situation, the EPFO (Employees' Employee Provident Fund Organization) is now providing a Unique Account Number (UAN) where multiple accounts can be managed through a single portal. The scheme was launched in the month of October 2014. It is advisable for all the working professionals to obtain their UANs 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 on the EPF alone. That is because due to offering fixed returns, it does not allow you to avail 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 for the post retirement life, considering medical inflation. In view of this, some other investment options should also be explored to ensure complete fulfillment of the retirement goal.
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