New Delhi: The contribution made to Employees’ Provident Fund (EPF) is eligible for tax benefits under Section 80C. The interest you earn on EPF every year and the maturity amount is also tax-free so it is essential to avail the benefits of EPF to build a retirement kitty. Every month, 12% of basic salary of an employee goes to EPF account. The employer also makes a matching contribution of which 8.33% subject to a maximum limit of Rs 1,250 every month goes to Employee’s Pension Scheme (EPS).
With the rise in your salary, your EPF contribution also increases, which is critical for building a large retirement corpus. However, to maximise the benefit from your EPF and EPS account, you should follow the below-mentioned rules.
Do not make partial withdrawals from EPF account
EPFO allows partial withdrawal from EPF corpus for short term needs like education/marriage of self, children, medical treatment of self and family members etc. However, experts say one should not dip into his EPF corpus for short term needs. If you do not make partial withdrawals from your EPF account and contribute till your retirement then the compounding effect will be much higher and you will get a sizable corpus at the time of retirement. Even if lose your job for few months or years, don’t close your EPF account as interest will be payable on the balance until the age of 58.
Enhance contribution via VPF
The interest rate paid on EPF account is much higher than the interest earned on other fixed income products like PPF. So financial planners recommend contributing a higher amount than the mandatory 12%, to EPF through Voluntary Provident Fund (VPF). The VPF is an extension of the EPF that allows you to invest beyond the 12% threshold while providing the same tax benefits and return. While there is a cap of Rs 1.5 lakh per year on PPF investment, there is no such restriction on VPF.
Transfer EPF balance while changing jobs
In order to accumulate a large retirement corpus, it is advisable to transfer you EPF balance while changing jobs. Withdraing the EPF corpus while changing jobs is never recommended by experts as it has several downsides. First, it could increase your tax liability. Even after you leave the job, the account continues to fetch interest until it becomes inoperative upon retirement. This accrued interest component becomes taxable, even if you do not withdraw money from the account, said a report in the Economic Times.
Also, if you don’t transfer your EPF balance on job switch then the five year continuous service clause for tax exemption is reset to the starting date of the new account. Withdrawal from EPF within a few years of job change may become taxable even if you have completed five years of continued service spread over the two or more employers. Not transfering EPF balance also means that employment tenure at previous companies will not be counted towards pension eligibility upon retirement under the EPS. An individual is eligible for pension benefit once he has completed 10 years in service.