Don't you hate it when you look at your salary slip and find that sundry deductions have pared it down. But believe us, you should actually feel happy about one of these deductions-the monthly contribution to the Employees' Provident Fund (EPF). The 12% of your basic salary that flows into the EPF every month has the potential to make you a crorepati when you retire.
Sounds unbelievable? After all, the investment seems too small and the interest rate offered doesn't seem too high. But don't forget that a matching contribution comes from your employer every month. Don't also underestimate the power of compounding and what it can do to your retirement savings over the long term. As the graphic above shows, the 8.5% interest earned on the EPF can help a person with a basic salary of Rs 25,000 a month accumulate a gargantuan Rs 1.65 crore in 35 years.
The Direct Taxes Code had initially proposed that new contributions to the EPF be taxed on withdrawal. However, the revised draft has once again made EPF fully exempt. This makes it the best debt option available in the market.
In fact, the EPF can single-handedly account for the debt portion of your financial portfolio. You need not invest in tax inefficient fixed deposits or worry about which debt fund to invest in. All you need to ensure is that you don't ever withdraw from your EPF account till you hang up your boots. If at any stage you find that your debt portion is lagging, you can add more through a voluntary increases in your contribution.
However, few people are able to reach even the Rs 1 crore milestone in their careers. EPF rules allow encashment of the accumulated corpus when a person quits a job and it's not uncommon for people to withdraw their PF at that stage.
This is despite the fact that the government discourages you from withdrawing the money. The withdrawals from the EPF within five years of joining are taxable. The tax will be minimal if the person is jobless and has no significant income from other sources but he won't completely escape the tax net. "When you withdraw you do not let the power of compounding to come into play," cautions Suresh Sadagopan, a Mumbai-based financial planner.
Transfer, don't withdraw: Instead of withdrawing money from the EPF on switching jobs, one should transfer the balance to the new account with the new employer. This does not happen automatically. You need to fill a ‘Form 13' and deposit it with the EPFO. Financial advisers recommend that you put this down among the list of priorities at the new workplace. "You should take up the matter with new organization as soon as you join. With passage of time you might get busy. Also, if your previous organization has lost the records, you could face a hard time looking for your PF details," adds Sadogapan.
In the form you are required to fill in details of your previous organisation including the previous EPF number and the regional provident fund office. The account number is basically a combination of your employee code, the PF regional office with which the account is maintained and your employer's PF code. Once the new organisation gets these details, it adds the new account number to it and submits the form to the regional office with which your previous organization had an account. In case your previous organisation had maintained a trust, the form has to be sent to the trust and a copy to the regional provident fund.
Though the process of transferring takes nearly a month, the good news is that the EPFO is developing a new software for enabling online transfer of money from the older accounts to the newer ones. This will not only reduce the paperwork but also the time taken for the transaction.
What if you don't transfer: Till now, there was no compelling reason to transfer the money from an old account to a new one. Even if you stopped putting money in your account, the balance kept earning interest till the time of withdrawal. This will stop from April 2011. After three years of inactivity, the balance will stop earning interest.
Even otherwise, multiple accounts can be a pain. They only add to your paperwork because you need to keep records of different accounts. Also, you will need to fill up separate forms to withdraw the money from the accounts. The process gets more cumbersome if accounts are located in different cities. "Transferring the balance not only makes it easy to transact, but also gives the subscriber a better idea of how much he has in his account," says Amit Gopal, senior vice-president, India Life Capital.
In future the social security number, which is in progress, would make EPF portable. "Once this number is allotted to members, they need not switch the funds. The new employer would make the contributions into that account. It will be completely independent of the workplace," he adds.