Every year during Diwali, the chatter grows about how soon Employees’ Provident Fund Organisation (EPFO) subscribers will get their interest for the previous financial year credited into their EPF accounts. This year has been no different.
Meant to help employees build a retirement corpus by mandatorily deducting 12 percent of their basic pay every month, it is highly popular due to the guaranteed nature of its returns and the tax benefits that it offers.
Here’s a guide to understanding the basic features and benefits of EPF.
How is the interest rate for a financial year calculated?Every year in March, the EPFO’s central board of trustees, under the Ministry of Labour, decides the rate of interest for the financial year. This is then approved by the Finance Ministry, paving the way for the Labour Ministry and the EPFO to credit interest into employees’ accounts. For the financial year 2021-22, the interest rate is 8.1 percent, and the interest is expected to reflect in employees’ EPF accounts soon.
How can I check my EPF balance?Your EPF passbook will reflect your EPF balance, including interest credited. You can check your EPF balance by logging on to the EPFO member portal using your UAN (universal account number allotted to your account) and password. If you haven’t registered or activated your UAN on the portal, you will first need to do so. The other mode is to send an SMS ‘EPFOHO (your) UAN’ to 7738299899 from your registered mobile number. You can also give a missed call to 011-22901406 to know your balance.
Should I continue my voluntary provident fund (VPF) contributions even now, when interest rates are going up, making other fixed income instruments attractive?Your employer mandatorily deducts 12 percent of your basic salary as your contribution to your provident fund. However, you can choose to contribute a higher amount voluntarily. This VPF contribution will earn the same rate of interest and enjoy the same tax benefits that EPF does.
However, if your total contribution (voluntary or otherwise) exceeds Rs 2.5 lakh a year, the interest earned will attract tax at the slab rate applicable to you. “For those in the highest tax bracket, the effective return will come down to around 5.58 percent. Given the rising rate scenario, there are other instruments that can yield higher returns. They can consider the National Pension System (NPS),” says SEBI-registered investment advisor Preeti Zende, Founder, Apnadhan Financial Services.
However, it remains a highly preferred option for those whose total contribution does not exceed Rs 2.5 lakh a year. “If your mandatory and voluntary contributions put together do not breach this cap, you should continue with VPF,” she adds.
Not only is an 8.1 percent return better than what most other fixed income instruments offer, it is also risk-free. “It is guaranteed and tax-free (to the extent of Rs 2.5 lakh a year). There is no better instrument than this for those whose total contribution is limited to Rs 2.5 lakh,” says Mrin Agarwal, Founder, Finsafe India.
What are the tax benefits that EPF and VPF offer?Your contribution of 12 percent of your basic pay is eligible for deduction under section 80C, subject to the overall limit of Rs 1.5 lakh, under the with tax-benefit regime. The interest accumulated throughout the period as well as the final maturity corpus are also tax-free.
However, if your total contributions exceed Rs 2.5 lakh a year, the interest earned on this amount will be taxable as per the marginal rate in that financial year. Your voluntary contributions, too, are entitled to these tax breaks, provided the limits are not breached.
Also, if your employer’s contribution (which is also 12 percent of your basic pay) is over Rs 7.5 lakh in a year, the excess amount is taxable in your hands.
Can I make withdrawals from EPF to buy a house?Yes, you can. Your provident fund is locked in until retirement, but EPFO specifies certain conditions under which you can make partial, premature withdrawals.
House purchase, treatment of critical illnesses and education of self, spouse and children qualify as valid reasons for allowing partial withdrawals. For house purchase, you can withdraw up to 36 times your basic salary and dearness allowance to fund your house purchase (or the balance amount or actual cost, whichever is lower), provided you have been an EPF member for at least five years.
You can also withdraw up to 100 percent of your funds if you have remained unemployed for over two months (and up to 75 percent if the period is at least one month).
I have just switched jobs. Should I withdraw my EPF funds?No. For one, rules do not permit withdrawals during working years, barring a few emergencies. Your new and former employers have to facilitate a balance transfer. “A few years ago, the transition was tedious and employees chose to withdraw the entire amount citing break in employment. However, due to the UAN framework, it is easier to link accounts and initiate a transfer,” says Zende.
Unless you have exhausted all other options such as liquidating dud investments, tapping gold assets etc, it is best not to make premature withdrawals. “It is meant for the long-term, to ensure your financial security after retirement. If you withdraw in the interim, you will lose out on the benefit of compounding over the long term, which delivers a blow to your retirement planning,” says Agarwal.
How should I make or change an EPF nomination?Making and updating nomination is a highly critical task, as it ensures that the right person receives the provident fund corpus, pension (employees’ pension scheme) and insurance (employees’ deposit linked insurance scheme) proceeds in the event of your death.
You can initiate the nomination process by visiting the EPF portal. Go to ‘Services’ and then ‘For employees’ and ‘Member UAN/Online service’ tabs. Log in and choose ‘e-nomination’ under the ‘Manage tab’ option. Enter your details and click on ‘save’. Next, enter your family as well as nomination details and follow the instructions to complete the nomination process.