by Vinaya HS on June 2, 2010
in Finance
In response to my post on why you shouldn’t opt for a decrease in your Employee Provident Fund contributions in lieu of an increase in your take home pay, reader Siva commented:
But, in need, it’s always a problem to get back your money from the Government PF office. When a friend wanted to start on his own, he had big troubles while withdrawing the PF money from his previous employments. In fact, it was a nightmarish experience for him at the Government PF office.
I’ve heard similar stories in the past and hence thought I’d open up this question for you to answer. How easy (or difficult) is it to withdraw your EPF balance?
Do you have an experience to share?
by Vinaya HS on February 16, 2010
in Finance
One of the suggestions that came up during an office discussion about the effects of the recent circular issued by the Central Board for Direct Taxes (CBDT) was:
Employees whose basic salary is greater than INR 6,500 per month can opt to receive an employee provident fund amount limited to 12% of INR 6,500 i.e. INR 780 per month. This would increase the take home pay for such employees.
Though this suggestions looks attractive at first sight, there are several drawbacks.
- You loose your employer’s matching contribution. If your basic salary is a significant amount, you stand to loose a significant amount of free money.
- You loose the income tax exemption benefits that you would have otherwise gained with a higher employee provident fund contribution. In other words, your take home pay doesn’t really increase as much as you expect it to.
- You loose the benefit of automatic savings — each month.
Unless you desperately need the few — if any — extra rupees each month, it’s always a bad idea to opt for a decrease in your EPF contributions in lieu of a [hypothetical] increase in your take home pay. And remember, the truth always lies in the calculations.
What do you think?
Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.
by Vinaya HS on June 23, 2009
in Finance
Recently, at work, there was a restructuring of our salary components. Many concerns were raised when the outside consultants proposed that Basic pay be at least 50% of the Gross pay — it was finally fixed at 40%. I think we lost out. Here’s the math (all figures are per annum).
Suppose your Gross pay is Rs 500,000. At 50%, your Basic pay is Rs 500,000 x 50% = Rs 250,000. At 12%, your contribution to EPF is Rs 250,000 x 12% = Rs 30,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 60,000.
On the other hand,
At 40%, your Basic pay is Rs 500,000 x 40% = Rs 200,000. At 12%, your contribution to EPF is Rs 200,000 x 12% = Rs 24,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 48,000.
Observe closely. That’s a straight Rs 12,000 less in your automatic savings. You just saved your employer Rs 6,000. You also lost Rs 6,000 as part of your automatic income tax savings.
In general, the higher the Basic pay, the higher are these figures. Employer’s contribution to EPF is akin to free money. Why would you ever want to lose out on that?
And the gains? Rs 500 extra in your pocket each month.
Which option would you choose?
Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.
by Vinaya HS on March 3, 2009
in Finance
This is a guest post from Shilpa at Under the Rainbow. Though Shilpa claims that “she knows zilch about financial planning,” her post below proves the opposite. This story-style post on personal finance is the first of its kind on this blog and is the perfect complement to my posts on EPF.
In 1993, Mr. and Mrs. Parasher, aged 45 and 43 respectively, both government employees had just paid off their home loan. They had three children — a son studying in class eight and twin daughters studying in class five. Although Mr. Parasher was setting aside small amounts for retirement for some time, it was now that he thought is the right time to start serious retirement planning.
At that point, Mr. Parasher’s basic pay was about Rs 5,000 per month. 12% of his basic was being cut from his monthly gross towards EPF, his company was contributing an equal amount, with the total contributions being compounded at 8-9% every year (variable annually).
The first step Mr. Parasher took to secure his retired life was to voluntarily contribute to his EPF account over and above the standard 12%. He increased his contribution to EPF to about 18% (12% EPF + 6% VPF) of his basic. The company still contributed 12% of the basic. With time came promotions and salary hikes. He took advantage of this and gradually increased his VPF percentage.
In 2000, Mrs. Parasher took a voluntary retirement from service and that fetched her a sum of rupees seven lakhs. At that time, their son was pursuing Engineering degree and the daughters were still in school. The Parashers set aside this money for their daughters’ education and marriage.
Early last year, in 2008, Mr. Parasher retired. At that time, his basic pay was about Rs 25,000 per month and his VPF contribution was about 80% of the basic. He now draws a pension amount of over Rs 22,000 a month — good enough to lead a decent lifestyle.
VPF or Voluntary Provident Fund is not applicable only to pensionable jobs. Since the PF interest is compounded annually, it is a good idea to contribute over and above the EPF and transfer the account when you move across companies. You will have a sizable sum at the end of your work life.
Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.
by Vinaya HS on February 24, 2009
in Finance
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.
Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.
