The EPF or the PF forms a major part of the retirement funds you get. Plan to keep the money secure for your future. Make some safe investments in growth instruments to keep up with inflation. You can use Fixed Deposits and other savings to secure a part of your PF funds for assured returns.
What is EPF or PF?
Employee Provident Fund or EPF, simply referred to as PF is one of the main ways to build a retirement corpus for salaried people. This is a mandatory scheme under The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
Under this scheme, the employee should contribute 12% of his basic pay + DA towards the PF. The employer should match this amount, so it is another 12% of the Basic Salary of employee + DA. However, while the whole contribution by the employee goes towards the EPF, the Employer’s contribution is divided between EPF and EPS for the employee. The Employee Pension Scheme (EPS) is another corpus for retirement. While the EPF funds earn an interest (currently around 8%) the EPS funds do not earn an interest.
Out of the 12% of the Basic Salary + DA contribution made by the employer
1. 3.67% goes towards EPF
2. 8.33% is supposed to go towards the EPS kitty
However for this calculation, a maximum amount is set for the employee salary. Currently it is Rs. 15,000.
Voluntary Provident Fund
The Employee Provident Fund Organization (EPFO) makes a provision to allow the employee to contribute more than the mandatory 12% towards the EPF. So, the employee may decide to contribute 15% of his basic salary + DA towards EPF each month. The excess amount is managed separately, as Voluntary Provident Fund (VPF) and this also earns an interest. Still, the employer is under no obligation to match this excess contribution. The mandatory contribution by the employer is limited to 12%.
On retirement, the employee gets the saved up EPF and VPF funds plus the interest earned.
Tax on EPF
The EPF funds can either be transferred to the new employer if you switch jobs, or you can withdraw the amount. If you opt to withdraw funds before completing five years of continuous service, the saved amount and the interest will be subject to taxes.
If you quit your job before completing five years but transfer the EPF to the new employer, and if you remain in this job to show a total of five continuous years of service (previous + current job), then the EPF savings and the interest earned become tax-free, even if you decide to withdraw an advance amount for any financial need.
The Role of Fixed Deposits in Managing your EPF Corpus after Retirement
After retirement you secure the funds you have saved up while at the same time plan to invest some of it to facilitate capital growth to meet inflation rates. So, divide your funds between secure savings like Fixed Deposits and some capital growth options.
Fixed Deposits earn a decent interest, and provide stable growth of your capital. However, there are other reasons beyond these that make FDs one of the best places to park your retirement funds. Here’s why:
Fixed Deposit Schemes offered by banks and NBFCs operate within strict guidelines issued by the Reserve Bank of India. So, your deposits are comparatively safer in these schemes. Look for FD schemes with high credibility and stability. Bajaj Finance Fixed Deposits comes with CRISIL’s and ICRA’s stable ratings ensuring your investment is never at risk.
With Fixed Deposits, there is no need to worry about the principal amount, but returns may be a cause of concern. However, once you create the deposit, the prevailing interest applies. So, whether the interest rate moves up or down during the deposit tenor, the interest rate set at the time of deposit will generally not change. So, the assured amount will definitely come to you, unless you plan to withdraw money prematurely.
While FDs have definite tenors, you can break an FD before maturity in case you need funds. You will only get interest earned for the period you keep the deposit minus a penalty, which is calculated on the interest. But, you will still be able to earn an interest and get access to funds quickly.
If you want to avoid the penalties and charges involved in closing an FD before maturity, you have another option. You can take a loan against most Fixed Deposits. You can get up to 80% or even 90% of the deposit amount as loan, and the interest charged will be lesser, compared to other loans.
The advantage is that the FD will still keep earning an interest. The interest charged on the loan will only be about 1 or 2% higher than the interest paid on the FD by the bank or NBFC. In effect, you only need to pay this difference as interest on the loan.
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