The most significant tool in the arsenal of retirement planning is the Employee Provident Fund. When kept for long-term, it can not only meet retirement goals but also surpass them because:
- It has 100% tax-free interest
- Interest works on compound growth
Both these factors ensure that on the time of maturity PF provides a substantial nest egg. Illustrated below are all the advantages an EPF affords a person and their loved ones in times of need, emergency or after retirement.
What are the merits of Provident Fund?
The Employee Deposit Linked Insurance scheme states that a company has to contribute 0.5 % of the monthly basic pay as a premium of insurance cover. EDLI is applicable when the organisation doesn’t give its employees a group insurance scheme. The contribution of the employer is capped at Rs. 6,500. Furthermore, the insurance coverage amount is the higher one of the following two:
- Twenty times the average wages of the past one year (up to Rs 6,500 per month) which comes out to be Rs 1,30,000.
- The full amount in the PF account (up to Rs 50,000) plus 40% of the balance amount.
For workers in small enterprises, the sum EDLI produces is, at times, more than enough for survival.
EPF comprises of two elements:
- Provident Fund
- Employee Pension Scheme
The latter was introduced in 1995. While the contribution of the employee, which is 12% of basic pay plus DA, goes entirely to PF, the input of the employer is divided. Out of the 12% the company has to give, 8.33% is deposited into EPS. This is capped at Rs.541. The balance amount is added to the PF.
When a person retires, they receive a pension which is dependent on:
- The median salary they in the year prior to retirement
- The number of years they have worked
What this signifies is that the contribution to EPS, over the years, builds a substantial corpus as a pension. Due to a provision under the law, one can receive the EPS along with PF in lump sum amount. To collect a pension, one must:
- Be 58 years old or over
- Completed a decade of service without any withdrawals from it
In case an employee retires before reaching the age of fifty-eight, they can still collect the pension just at a lessened amount. Furthermore, on the passing of a worker, the family is entitled to the pension as along as set conditions are met.
It should be noted that there is a limit to the maximum amount of pension for each month – Rs. 3,500. There is a simple technique to bypass this limit if the employer uses the actual pay of the worker for contribution instead of the specified Rs. 6,500 per month.
- Unique Situations
One of the primary supports a person gains by PF online registration is a financial cushion during dire or extraordinary times. When an emergency arises, and there are no saved funds or help at hand, one can draw from the EPF. To dip into the corpus, some conditions have to be fulfilled and a specific limit crossed. Some examples of when EPD can come in handy are:
- A Medical Emergency:
For any major surgical operation or conditions like cancer, TB, leprosy, heart illness, mental issues, and paralysis, a person can withdraw money from the EPS. The amount that can be taken has to be lesser of the following two:
- 6 times the salary of the person
- Entire contribution made to the EPF till date
The fund taken out can be appropriated for the treatment of spouse, children, self or dependent parents.
- Any Life Goal
A parent plans for a child’s education and marriage, a person could wish to provide their sibling with higher education or an individual might want to study further. All these are life goals which can be financially aided through EPF. An employee can withdraw about half of the contribution for marriage or education of child, self or sibling.
This can be done up to three times in your service life. The only criteria to be met are:
- Valid document proving marriage or fee payable to the college
- Spent seven years in service
- Dream Home
When an employee wants to build a new house, repair or maintain an old one, they can utilise the money in EPF. It can also be appropriated for house loan repayment. The association specifies the contingencies that should be fulfilled for the same. The usual few are:
- For house loan repayment, one can use wages of three years from the EPF as long as 10 years of services have been finished.
- For repair or modification at home, one can withdraw wages equal to twelve months. This requires an existing house and can only be done once. For alteration, the person has to complete 5 years of service and for repair 10 years.
- To purchase a new home, an employee need only to work for five years. The amount drawn can be used for buying a new house or plot and construction of a new home. If land is purchased, the total that can be taken out is 24 months of wages. For a house, the amount can be 36 months of salary. This quantity can be collected only once in life. The house or the plot can be in employees name, spouse name or as joint ownership.
The pros of EPF are not limited to the ones explained above. There are some other circumstances where it can be utilized such as:
- Damage due to natural calamities
- Equipment purchases by physically handicapped
- If the person changes jobs and remains without a profession for over two months