Investment Planning 101: What Is EPF & How Does It Work?

A pension scheme is not just a fund for a rainy day during your retirement but provides the necessary support system to live a comfortable and respectable life after retirement. By not relying on anyone for personal expenses, retired individuals can continue living their lives as they did during their employment days. But everyone doesn’t have such pension plans from the employer. And most pure pension schemes are only meant for government employees. A worthy substitute for pension for private employees is Employees Provident Fund. 

If you are also looking forward to investing in EPF, you will get the basic knowledge here. Read on to know more about what is EPF, how it works, and how EPF contributions can create a huge corpus.

What Is EPF?

EPF of Employees Provident Fund is a national provident fund scheme introduced by the Indian government to benefit private sector employees. With this scheme, they can create a retirement fund for their future without going through much trouble. EPF is solely for employees working in an EPF registered organization with more than 20 employees.

If your employer doesn’t have EPF registration due to a lack of employees, you can voluntarily enrol in EPF. If any unemployed or self-employed person wishes to enrol in EPF, they cannot do so because of their employment status. However, they can join other provident fund schemes such as PPF, which is open to people with any employment status.

How Do EPF Contributions Work?

An employee in an EPF eligible company must have a basic pay of more than INR 15,000 to enrol in EPF. This limit is on the basic pay and not the entire salary. Your entire salary is the culmination of various components such as basic pay, professional tax, TDS, conveyance, dearness allowance, housing allowance, and various other special allowances and taxes.

After successful registration, the employer deducts a set percentage of just the basic pay every month. Now this percentage can be 10 or 12 based on the organization. The employer then contributes the deducted amount into the EPF account of the employee. The employer also contributes the same amount at their own expense into the same EPF account. So, if the employer deducts X from your basic pay, it deposits 2X into your account. By doing so, you instantly get double the benefit of your investment. But wait, there’s more.

EPF also has an interest rate of 8.1%. So the amount that accumulates in your EPF account increases further with such high interest rates. This EPF account remains the same for a person even if they change employers and remains active till the retirement age of 58. And they can withdraw the entire sum accumulated over their employment years.

EPF Returns And Benefits

Now that you understand what is EPF, you must also know its specific returns and benefits to the employee. This will help you understand its value as a great investment scheme. Given below are some returns and benefits that an EPF account provides.
  • High Interest Rate
  • Partial Withdrawal
  • Loan Facility
  • Safe Invested Capital
  • Assured Returns
  • Steady Capital Growth
  • Market-Independent Capital And Interest

Right Time To Invest In EPF

Any investment with such a high return rate as EPF will have the right time to invest. But fortunately, EPF doesn’t have such criteria. No matter when you join, the return rates are always high. But as seen in the past, EPF interest rates are decreasing over the years. So it would be better to invest in it as early as possible.

Young employees at the beginning of their careers also face the dilemma as to whether to choose EPF or not. However, EPF is a highly efficient investment scheme, and as you don’t have many financial obligations when you are young, the EPF contributions won’t matter much. So you can invest in EPF and still have money for other requirements.

Also, the deduction is not of your entire salary; it is just 10 or 12% of your basic pay. So you won’t notice a lot of difference. But when you invest money with such discipline, almost similar to a SIP, you can accumulate a huge corpus by the end of your career. And you can use the corpus for other important personal or family requirements.

EPF is a great backup plan which already has double the investment and with an added benefit of high interest rates. By investing in EPF, you can get liquidity whenever you.
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