Until a few generations back, jobs were held for life and was followed by pension on retirement. With job patterns and the approach towards life and work changing, people now are less inclined to spend most of their professional life in a single organisation. In such a situation, it is essential that you keep track of your investments, especially those linked to the employer, such as the Employees' Provident Fund (EPF).Salaried people changing jobs or taking voluntary retirement often forget to transfer or withdraw their EPF. Others fail to make timely follow-ups on their EPF transfers and later realise that the account has gone dormant and the money parked in the account has turned out to be a dead investment with no returns. According to government figures, there are over Rs 32,000 crore parked in such dormant EPF accounts.
To ensure benefits for dormant account holders, the Central Board of Trustees of the Employees' Provident Fund Organisation (EPFO) has given its go-ahead to pay interest on all dormant EPF accounts from April 1, 2016.
The EPF is a compulsory benefit scheme set up by the EPFO for the salaried class, where the amount parked in the account gets an annual interest. For financial year 2015-16, the rate was fixed at 8.8 per cent. While your contributions are made monthly, the interest is calculated yearly.
At the start of every year, you have an opening balance, which is the amount accumulated till date [A]. Your opening balance for the next year would be: opening balance [A] + total monthly contributions + interest on the (opening balance [A] + contribution).
The EPF provides returns at a stable rate of interest and is a very good long-term investment option. When you start working, you and your employer both contribute 12 per cent of your basic salary, up to a maximum amount of Rs 6,500 per month, (plus dearness allowances, if any) to your EPF account . The entire 12 per cent of your contribution goes to your EPF account along with 3.67 per cent (out of the 12 per cent) from your employer. The balance 8.33 per cent from your employer is diverted to the Employees' Pension Scheme (EPS).
Here is an illustration to explain the potential savings from the EPF.
Amita starts working with a basic salary of Rs 20,000 and receives a 5 per cent increment every year. She has worked for 35 years (starting at the age of 25, up to age 60) and has contributed 12 per cent of her basic salary, which has been matched by her employer as 3.67 per cent to EPF and 8.33 per cent to EPS. Her total contribution in 35 years has been Rs 26.01 lakh and the company has contributed Rs 7.95 lakh, making the total contribution at Rs 33.96 lakh. This amount will grow to Rs 1.38 crore at the time of her retirement (assuming a constant rate of interest at 8.5 per cent).
Previously, inactive EPF accounts for more than 36 months were considered dormant. The EPFO stopped paying interest on such accounts from April 2011. However, from April 2016, all EPF account holders, including the ones with dormant accounts, will earn an equal interest. This decision was in response to the demand by various trade unions seeking interest income on dormant accounts.
With the new regulation in place, the concept of an inoperative or dormant account has been laid to rest. Hence, over 40 million account holders, who had inactive or dormant accounts, will now start earning interest on the money parked in EPF accounts.
So, even if you could not transfer or withdraw your money from an EPF account after a job switch for any length of time, your account will continue to earn interest and provide you a good retirement planning tool.
In this way, the government is also encouraging more voluntary investments in EPF to make it an effective investment vehicle on a par with its counterparts such as Public Provident Fund, National Pension Scheme etc.
The EPFO will also pay an additional interest to all account holders for three years once they reach the age of 58. So, should you choose not to withdraw your EPF funds at the time of retirement, you can get an extra three years of interest till the age of 61. Interest on EPF savings will be credited even if the account holder expires.
You can withdraw your entire EPF savings, including interest at the time of retirement at the age of 58 years or opt for an additional interest for three years, should you choose not to withdraw your EPF amount on retirement up to a maximum age of 61 years. You can also withdraw up to 90 per cent of your EPF amount at the age of 57, that is one year prior to retirement.
Premature withdrawals are generally not allowed from your EPF account, unless you've given up working or want to be self-employed, etc. Nevertheless, you can withdraw a portion of your EPF savings for marriage or education of yourself, your siblings or children or to cover emergency medical expenses for yourself, spouse, children, or dependant parents.
You can also use your EPF savings to repay housing loans for a house owned by you, your spouse, or jointly after 10 years of service and contribution to EPF. If you have completed seven years of service, you can withdraw 50 per cent of your contribution up to three times in your working life.
There is no tax applicable on EPF at the time of investment, interest accrual or withdrawal phase, provided you maintain the account for more than five years. Hence, keeping your money parked in EPF accounts is a good way to generate regular interest to beat the towering annual inflation.
The writer is CEO of BankBazaar.com