The Buyt Desk
Every salaried individual makes a monthly contribution to their employee provident fund(EPF). The employer also contributes 12% of the employees basic salary to the employee’s provident fund. Government pays an interest on EPF thus making the size of the corpus big over the years. This is the fund which is meant for the post retirement stage of life. But at times this available fund may tempt you to withdraw some money to meet your immediate fund requirement. Refrain from this temptation and ensure that you don’t withdraw money from this account before retirement. Use this option only when absolutely necessary. If you withdraw money from this account before retirement, then it will bear a big brunt in the long run. Here are 5 reasons why you should not prematurely withdraw from your PF–
1. EPF earns you the best interest
The purpose of PF scheme is to provide social and economic security to the provident fund members. For this reason, compared to all the other savings schemes of the government, at present the highest interest rate of 8.5% is being given on PF. That is why this scheme is most useful for investment and savings. Bank FDs are generally considered a good option for safe investment and fixed income. At present, there is barely 4 – 6% interest in the FD scheme of major banks. When you compare the bank’s FD with 8.5% interest of EPF there is an advantage of almost 3%.
2. Saves Your Income Tax
Contribution to PF under the Income Tax Act provides the benefit of tax deduction under section 80C on the amount up to Rs 1.5 lakh. In this way, the amount of money deposited by the employee in the PF account during a financial year is directly reduced from his income. This gives a big relief on the income tax front. Not only this, the entire amount received at the time of retirement is tax free.
3. Guaranteed Insurance Cover
Under the existing rules, life insurance is provided under the Employees’ Deposit Linked Scheme (EDLI) to the employee whose PF is deducted. At present, in lieu of insurance cover, the employer contributes an amount equal to 0.5 percent of the basic salary of the employee. The insurance cover under this scheme is up to Rs.7 lakh. Under this scheme, in the event of the death of the employee, the sum insured is paid to his nominee, family or heir.
4. Pension
Another great advantage of PF is that under the EPS-95 scheme, one gets lifelong pension after retirement. After the death of the pensioner, his spouse also gets this facility. This amount proves to be very useful in old age.
5. Tax on Withdrawal of PF
If you withdraw from PF before the completion of 5 years, then TDS is deducted on it. But if the amount withdrawn from PF account is less than 50,000 then TDS will not be deducted. But keep in mind here that if your income is taxable, then you have to show this withdrawal amount in ITR.
PF is not your emergency fund but this your retirement fund. The COVID-19 pandemic resulted in loss of livelihood and pushed people to dive into their PF. There is no harm in using your money but PF should be the last resort. We at The Buyt always advocate that you should mandatorily build an emergency fund to help you through your bad times. Having an emergency fund will ensure that you do not touch your retirement fund before you reach that stage.
Sharing link of the previously published article that will help you understand how to build your emergency fund.
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