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This post is the result of a conversation I recently had with a reader.
If your employer offers you the option to avail of Employees’ Provident Fund (EPF) facility as part of your salary package, I’d strongly recommend that you take up this option. Often, employers make salary offers which compare your salary package with and without the EPF option. The package without the EPF option is deceptively alluring since it always shows a higher monthly gross — but not necessarily net (which is not shown) — pay. You shouldn’t jump up and choose this option simply by looking at the illustrative (and often illusory) gross figures.
So, what do you gain by opting for the EPF facility?
- You contribute 12% of your monthly basic each month. Your employer also contributes an equal amount each month. That’s 24% of your monthly basic saved each month!
- The total contribution earns 8.50% per annum compounded (interest rates are decided each year though).
- Your annual contribution (i.e. 12% of your monthly basic x 12 months) automatically qualifies for income-tax exemption under Section 80C.
- When you change jobs, you can choose to withdraw the accumulated balance (takes a few months for the amount to be credited) or you can transfer the accumulated balance into the account opened by your new employer.
For me, the automatic savings each month is good enough a reason to opt for this facility. Over a period of few years, this can grow into quite a substantial sum. I doubt if I’d voluntarily save this much money!
What do you think? What has your experience been?
Update: February 25, 2008
Below is a continually updated list of EPF-related queries which are answered in leading financial magazines such as Outlook Money and Money Today.
From Money Today, March 05, 2009 — Page 06
Q: I have been working with an MNC for the past three years. Now, the company is shutting down and I am moving to a new job with a private firm. Should I withdraw the money from my provident fund or transfer the balance to my new account?
A: The taxability of the provident fund amount withdrawn depends on the duration for which the employee contributes to it. If he has worked for more than five years with the same company, the amount withdrawn from the provident fund is exempt from tax. If he has worked for less than five years, the entire amount withdrawn is taxable. As you have been with the firm for only three years, it is advisable to transfer the balance to your new employer. This will help consolidate your provident fund money and you will not have to pay any tax.
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