PF withdrawal norms dropped: There could be good reasons to keep your money with the EPFO unless you need it for a specific purpose and you have no alternative sources to meet those expenses.
By: Sarbajeet K Sen | Updated: April 20, 2016 5:25 PM | Indian Express
Employee Provident Fund members may have won the battle against the government’s move to impose restrictions on EPF withdrawal, but should they rush to take out the money if eligible to do so?
There could be good reasons to keep your money with the fund unless you need it for a specific purpose and you have no alternative sources to meet those expenses.
Here are a few reasons why you should consider staying invested in with the Employee’s Provident Fund Organisation (EPFO).
Provides old-age income security: The main purpose of contributions to EPF is to create a corpus for the golden years of the members. The corpus created through compulsory savings should be looked at as a fund that would provide financial security at old age. It should not be withdrawn unless for specified emergency purposes. Besides, there is provision for pension and insurance under EPFO.
High rate of interest: EPFO has set the interest rate for 2015-16 at 8.8 per cent, which makes it one of the most lucrative fixed-income savings instruments. This is even better than Public Provident Fund (PPF) which now gives an annual interest of 8.1 per cent. Hence, financial advisors often suggest voluntary increase in EPF contributions from the employee side beyond the mandatory 12 per cent of basic.
Compounding for more years builds large corpus: With the money being compounded at a healthy interest rate the fund can help generate a corpus at retirement can be substantial. A quick calculation shows that an average monthly contribution of Rs 5000 for 30 years at 8.8 per ent compounded annually will create a corpus of Rs 82.35 lakhs after 30 years. However, if the same it withdrawn after 25 years, you will get around Rs 54 lakhs and over 20 years the corpus will be substantially lower at Rs 32 lakhs.
Provides tax-free returns: EPF enjoys Exempt, Exempt, Exempt (EEE) status and hence it is not taxed throughout its life including contribution, accumulation and withdrawal. If tax-saving is factored in, the 8.8 per cent interest rate works out effectively to nearly 12.5 per cent interest if you are in the 30 per cent tax bracket. However, if you withdraw the corpus before completing five years as member and the amount is over Rs 30,000, you will have to pay tax as per your income slab.
Interest paid even in dormant accounts: The government has recently taken a decision to resume paying interest on ‘dormant’ EPF accounts. Earlier, if your money with EPFO had no contributions for over 36 months it was being categorized as ‘dormant’ and no interest was paid on it. That was a good reason to withdraw the money and invest it to other productive avenues. Not any longer. You can now retain the accumulation and earn healthy interest till retirement.
Source : http://goo.gl/mKmSU7